5.4 Costs

5.4 CostsCostsObjectivesWhat costs do business incur?How can costs be classified;Direct or indirect.Variable or fixed.Break-even analysisWhat 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 costsDirect 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 costsFixed 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

6Teachers note: The information provided in the summary panel for fixed and variable costs could spark a discussion on what other costs might fall into this joint category.FormulasTotal Variable Costs = Variable cost per unit * QTVC = VC * Q

Total Costs = Fixed Costs + Total Variable CostsTC = FC + TVC

Revenue = Price * QR = PQTHE FormulaProfit or Loss = Revenue Total Costs

If R > TC = profitIf R< TC = loss

Case study: Suzys Driving SchoolSuzy Clarke has decided to set up her own driving school. She has the following costs:

Petrol:10 per lesson

Maintenance:5 per lesson

Insurance and tax:50 per week

Repayments: 30 per week

Advertising:30 per week

Wages:250 per week

Phone bill:1 per lessonShe charges 25 for a 30 minute lesson and can do no more than 60 lessons a week.9Teachers note: As the students are going to need this information in the following slides, it is worth getting them to record these figures at this stage.Case study: Suzys Driving SchoolY 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 Suzys Driving School Break Even Analysis: Suzys Driving SchoolThe 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 Suzys Driving School Calculating the BEPContribution = P-VC

BEQ = FC/Contribution

Try it for Suzy;FC = 360VC = 16Price = 25Draw a break even chart for the following:Fixed Costs = $10,000Variable Cost = $10Selling price = $15Maximum 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 questionsWho wants to be an A* student?

20Answers:Balances its costs and revenueMakes a profitBEPUnits of productionProfitNo effectDirect costsRaw materialsMargin of safetyFixed costs contribution per unitBreak Even AnalysisPage 512Make notes onBreak-even analysis further usesEvaluation of break-even analysisPaper 2 Nov 112aii, 2bi, 2biiExtension: Have a look at 1c.Break Even AnalysisWarning:Break-even assumes that the factory, school, machinery, etc. already exists. Other investment appraisal techniques must be used to include these in the analysis. PlenaryObjectivesWhat costs do business incur?How can costs be classified;Direct or indirect.Variable or fixed.Break-even analysis