You are considering purchasing a new testing machine that has a fixed cost of $100,000, generates revenue of $500 per test, and variable costs associated with testing of $50.

You want to know: How many tests does your office need to do for you to cover your initial $100,000 investment. If you had $0 costs associated with each test, you would divide your initial investment by $500, the revenue you receive from each test. However, your cost for performing the test is $50 not 0. So, $500 minus 0 = $450 per test.

The equation is simple: *Total revenues – total variable costs- fixed costs= profit *

So, here it is: (100x volume) – (50 x volume) – 100,000 = Profit

OR since you are calculating breakeven the profit = 0

OR (100 – 50) x volume = 100,000

OR 450 x volume = 100,000

OR volume = 100,000/450 = 223 tests

After performing 223 tests, each test (which generates $450 or the contribution margin) becomes pure profit because you have already paid off your equipment. (See previous explanation of CM) **GOT IT! **