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5.4 Costs

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 .

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5.4 Costs

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  1. 5.4 Costs

  2. Costs • Objectives • Whatcosts do businessincur? • How can costsbeclassified; • Directorindirect. • Variable orfixed. • Break-evenanalysis

  3. Whatcosts do businessincur? • Make a list of allthecoststhatyouthink Cambridge Collegeincurs. • What outputs does Cambridge Collegehave?

  4. Direct and indirectcosts • Directcosts – coststhat can beclearlyidentifiedwitheachunit of production. • Indirectcosts – coststhatcannotbeidentifiedwitheachunit of production. (These can alsobecalledoverheadcosts). • Sortyourlist of costsintoeither; directorindirect.

  5. Fixed and variable costs • Fixedcosts – coststhat do notchangewiththelevel of output (production). • Variable costs – coststhatchangewithincreasingordecreasing output (production). • Sortyourlist of costsinto variable orfixed.

  6. Fixed and variable costs

  7. Formulas • Total Variable Costs = Variable cost per unit * Q • TVC = VC * Q • Total Costs = FixedCosts + Total Variable Costs • TC = FC + TVC • Revenue = Price * Q • R = PQ

  8. THE Formula • ProfitorLoss = Revenue – Total Costs • If R > TC = profit • If R< TC = loss

  9. Case study: Suzy’s Driving School Suzy Clarke has decided to set up her own driving school. She has the following costs: Repayments: £30 per week Wages:£250 per week Maintenance:£5 per lesson Petrol:£10 per lesson Insurance and tax:£50 per week Advertising:£30 per week Phone bill:£1 per lesson She charges £25 for a 30 minute lesson and can do no more than 60 lessons a week.

  10. Case study: Suzy’s Driving School • Y axis 0 to 1500 pounds, X axis 0 to 60 lessons • What are thefixedcosts? • Addthefixedcoststogether and graphit. • What are the variable costs? • Addthe variable coststogether. Youwillneedtofindthe Total Variable Costs at twopoints; suggest 0 lessons and 40 lessons.

  11. Break EvenGraphforSuzy’sDrivingSchool

  12. Break Even Analysis: Suzy’s Driving School • The break-evenpoint (BEP) iswhere no profitorlossismade (R=TC). • Whatisthe BEP forSuzy? • Assumethatmarketresearchsuggeststhat at 25 pound per lesson; demandshouldbefor 50 lessons. • Thedifferencebetweentheexpected sales level (or actual) and the BREAK EVEN POINT isthe MARGIN OF SAFETY.

  13. Break EvenGraphforSuzy’sDrivingSchool

  14. Calculatingthe BEP • Contribution = P-VC • BEQ = FC/Contribution • Try itforSuzy; • FC = 360 • VC = 16 • Price = 25

  15. Draw a break even chart forthefollowing: • FixedCosts = $10,000 • Variable Cost = $10 • Sellingprice = $15 • Maximumproductionquantity = 3,000 • Whatisthemargin of safety ifcurrentis 2,200.

  16. Pages 512 and 513 • Activity 28.4 Q1 • Activity 28.3 allquestions

  17. Who wants to be an A* student?

  18. Break EvenAnalysis • Page 512 • Make notes on • Break-evenanalysisfurther uses • Evaluation of break-evenanalysis • Paper 2 Nov 11 • 2aii, 2bi, 2bii • Extension: Have a look at 1c.

  19. Break EvenAnalysis • Warning: • Break-evenassumesthatthefactory, school, machinery, etc. alreadyexists. Otherinvestmentappraisaltechniquesmustbeusedtoincludethese in theanalysis.

  20. Plenary • Objectives • Whatcosts do businessincur? • How can costsbeclassified; • Directorindirect. • Variable orfixed. • Break-evenanalysis

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