Costs

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					5.4 Costs
                             Costs
• Objectives
  – What costs do business incur?
  – How can costs be classified;
     • Direct or indirect.
     • Variable or fixed.
  – Break-even analysis
 What costs do business incur?
• Make a list of all the costs that you think
  Cambridge College incurs.

• What outputs does Cambridge College have?
        Direct and indirect costs
• Direct costs – costs that can be clearly
  identified with each unit of production.

• Indirect costs – costs that cannot be identified
  with each unit of production. (These can also
  be called overhead costs).

• Sort your list of costs into either; direct or
  indirect.
        Fixed and variable costs
• Fixed costs – costs that do not change with
  the level of output (production).

• Variable costs – costs that change with
  increasing or decreasing output (production).

• Sort your list of costs into variable or fixed.
Fixed and variable costs
                   Formulas
• Total Variable Costs = Variable cost per unit * Q
• TVC = VC * Q

• Total Costs = Fixed Costs + Total Variable Costs
• TC = FC + TVC

• Revenue = Price * Q
• R = PQ
                 THE Formula
• Profit or Loss = Revenue – Total Costs

• If R > TC = profit
• If R< TC = loss
    Case study: Suzy’s Driving School
Suzy Clarke has decided to set up her own driving school. She has the following costs:



     Repayments:                         Wages:                        Maintenance:
     £30 per week                     £250 per week                    £5 per lesson




  Insurance and tax:                                                      Petrol:
     £50 per week                                                      £10 per lesson




      Advertising:                                                      Phone bill:
     £30 per week                                                      £1 per lesson

          She charges £25 for a 30 minute lesson and can do no more than 60
                                    lessons a week.
 Case study: Suzy’s Driving School
• Y axis 0 to 1500 pounds, X axis 0 to 60 lessons
• What are the fixed costs?
  – Add the fixed costs together and graph it.
• What are the variable costs?
  – Add the variable costs together. You will need to
    find the Total Variable Costs at two points;
    suggest 0 lessons and 40 lessons.
Break Even Graph for Suzy’s Driving
             School
  Break Even Analysis: Suzy’s Driving
               School
• The break-even point (BEP) is where no profit
  or loss is made (R=TC).
• What is the BEP for Suzy?
• Assume that market research suggests that at
  25 pound per lesson; demand should be for 50
  lessons.
• The difference between the expected sales
  level (or actual) and the BREAK EVEN POINT is
  the MARGIN OF SAFETY.
Break Even Graph for Suzy’s Driving
             School
            Calculating the BEP
• Contribution = P-VC

• BEQ = FC/Contribution

• Try it for Suzy;
   – FC = 360
   – VC = 16
   – Price = 25
• Draw a break even chart for the following:
  – Fixed Costs = $10,000
  – Variable Cost = $10
  – Selling price = $15
  – Maximum production quantity = 3,000

  – What is the margin of safety if current is 2,200.
• Pages 512 and 513

• Activity 28.4 Q1

• Activity 28.3 all questions
Who wants to be an A* student?
           Break Even Analysis
• Page 512
• Make notes on
  – Break-even analysis further uses
  – Evaluation of break-even analysis
• Paper 2 Nov 11
  – 2aii, 2bi, 2bii
  – Extension: Have a look at 1c.
           Break Even Analysis
• Warning:
  – Break-even assumes that the factory, school,
    machinery, etc. already exists. Other investment
    appraisal techniques must be used to include
    these in the analysis.
                        Plenary
• Objectives
  – What costs do business incur?
  – How can costs be classified;
     • Direct or indirect.
     • Variable or fixed.
  – Break-even analysis

				
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posted:9/25/2013
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