# Costs by pptfiles

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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
• 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

• 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

£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
• 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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