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4/27 Video Warm-up

4/27 Video Warm-up. Costs Boeing pays to produce the 737 Costs tied to level of production. Production ↑ => Cost ↑ Costs not tied to level of production Production ↑ => Cost Unchanged. Costs. Fixed vs. Variable Direct vs. Indirect Average Cost.

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4/27 Video Warm-up

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  1. 4/27 Video Warm-up • Costs Boeing pays to produce the 737 • Costs tied to level of production. • Production ↑ => Cost ↑ • Costs not tied to level of production • Production ↑ => Cost Unchanged

  2. Costs Fixed vs. Variable Direct vs. Indirect Average Cost

  3. Nature of Fixed & Variable CostsBusiness Expenditures to Produce Good or Service

  4. Total Costs of a Business Total Costs (Fixed + Variable) Costs ($) Total Variable Costs $5,000 Total Fixed Costs Output (units)

  5. Nature of Direct & Indirect CostsBusiness Expenditures to Produce Good or Service Direct Costs Indirect Costs (Overheads) Not clearly tied to a specific product Usually fixed, but can be variable Shared costs tied to production of several products • Tied to a specific product • Usually variable costs, but can be fixed (supervisors salary) • Used for businesses with multiple projects or products (cost centers)

  6. Cost Relationships Fixed Costs Product-A Costs Attributable To Product A (DIRECT) Resources Variable Costs Cost Allocation (share of indirect) Shared (INDIRECT) Cost Allocation (share of indirect) Fixed Costs Product-B Costs Attributable To Product B (DIRECT) Variable Costs

  7. Average Cost • Cost per unit of output Average Fixed Cost Total Fixed Costs Total Output Average Cost Total Cost Total Output Decrease as output increases Average Variable Cost Total Variable Costs Total Output Unchanged as output increases Average cost decreases as output increases

  8. Average Costs of a Business Cost ($) Average Cost Output (units)

  9. 5/4 Warm-up Define & give examples • Variable Cost • Fixed Cost • Direct Cost • Indirect Cost

  10. Revenue Revenue Contribution

  11. Sources of Revenue • Proceeds coming into the business • Sale of goods or services • Subventions – financial support from government or foundation (tied to output) • Grants – lump sums (not tied to output) • Donations – charities & some non-profits • Fundraising – special events to raise revenue • Sponsorship – financial support received for displaying a donor’s logo or trademark • Interest – return from loan investments • Dividends – returns from investments in other businesses • Fixed Asset Sales – gain from disposal of fixed assets

  12. Per Unit Contribution • Revenue remaining after deducting direct/variable costs to make product • Amount contributed towards paying indirect & fixed costs Per Unit Contribution Average Revenue Average Variable Cost Per Unit Contribution Total Contribution Output

  13. Contribution & Enhancing Profitability Average Selling Price Per Unit Contribution Average Variable Cost Output (Volume) Total Contribution Per Unit Contribution Total Fixed Costs Total Contribution Profit

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