Covering the costs of a new product Mr. BarryBusiness BTEC Year 11

Learning Objectives -Identify the difference between the differing types of costs -Identify the different types of revenue -Explain the importance of costs, revenue and profit for a business Mr. BarryBusiness BTEC Year 11

Dragons’ Den eurs/sandymaxwellforbes.shtml eurs/sandymaxwellforbes.shtml Mr. BarryBusiness BTEC Year 11

Starter _____________ - ______________ = PROFIT! Mr. BarryBusiness BTEC Year 11

Types of costs 1 Start-up costs: Are payments made before, or soon after, the start of a project Occur only once May be quite high (eg for a new building ) Mr. BarryBusiness BTEC Year 11

Examples of start-up costs New building or extension to existing building New machines, including installation Office equipment, including ICT Market research and advertising Initial stocks of materials Installation of gas, electricity, telephone lines New vehicles Mr. BarryBusiness BTEC Year 11

Types of costs 2 Running costs: These begin once the project has started They arise on a regular basis Must be paid for as long as the project lasts Mr. BarryBusiness BTEC Year 11

Examples of running costs Wages and salaries Heating and electricity Repairs and maintenance Business rent and rates Materials and stationery Telephone Advertising Vehicle running costs (eg diesel fuel) Mr. BarryBusiness BTEC Year 11

Warning! Stock (initial stock = start-up; regular stock = running) Advertising (initial adverts = start-up; regular adverts = running) Some types of costs can be both start-up and running costs, eg Mr. BarryBusiness BTEC Year 11

Key questions to ask Is the bill paid once only? If so, cost is a start-up cost. Is the bill paid regularly? If so, cost is a running cost. Mr. BarryBusiness BTEC Year 11

Importance of costs Questions: Why is it important to know your start up and running costs? Why is it important to reduce costs? Mr. BarryBusiness BTEC Year 11

The basics of break-even There are two types of costs: Variable costs increase by a step every time an extra product is sold (eg cost of ice cream cornets in ice cream shop) Fixed costs have to be paid even if no products are sold (eg rent of ice cream shop) Mr. BarryBusiness BTEC Year 11

Examples of variable costs Variable costs increase with the amount of production Raw materials Petrol Labour (paid by the hour) Packaging Mr. BarryBusiness BTEC Year 11

Example of Variable Costs One product costs £1 to produce £1 £4 £3 £2 Costs of production Production level Mr. BarryBusiness BTEC Year 11

Examples of Fixed Costs Fixed costs remain the same no matter the production level Rent Business rates (tax on businesses) Salary based employee wages Insurance Mr. BarryBusiness BTEC Year 11

Example of Fixed Costs £100 £400 £300 £200 Costs of production Production level Mr. BarryBusiness BTEC Year 11

Sales Revenue Revenue = selling price x quantity sold i.e – if a product is sold for £15 and sells 10 units then it will bring in £150 £15 x 10 = £150 Mr. BarryBusiness BTEC Year 11

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Sources of Revenue and Costs If you own a pizza restaurant, What happens when you sell one? What happens when you order more dough balls?

Revenue = income coming into the business from sales, through a grant, the leasing of premises or interest on money in the bank. Costs = any payments that are made from a business, for example telephone bills or the manufacture of products to sell.

Choose a Business Develop a powerpoint for a new business venture that you wish to setup. Explain your business idea and discuss the following Price and identify: Fixed costs Variable costs of your product/service Start up costs Running costs Expected Profit including Revenue and Expenditure Mr. BarryBusiness BTEC Year 11