Principles of Cost Analysis and Management Calculate Total Cost and Per-Unit Cost Given Various Production Volumes Principles of Cost Analysis and Management Show Slide #1: Calculate Total Cost and Per-Unit Cost Given Various Production Volumes Title: Calculate Total Cost and Per-Unit Cost Given Various Production Volumes   References: FM 1-06 Financial Management Operations, Lesson Created Handouts, and Notes. Section I. Administrative Data: Academic Hours/Methods 02 hrs. / 00 min. DSL (large or small group discussion) 00 hrs. / 00 min. PE (practical exercise (Hands On) 00 hrs. / 00 min. Test 00 hrs. / 00 min. Test Review 00 hrs. / 00 min. Total Hours Section II. Introduction: Method of Instruction: DSL (large or small group discussion) Facilitator's to Learner Ratio: 1:25 Time of Instruction: 00 hrs. / 05 min. Media: PowerPoint Presentation Motivator (Concrete Experience 5 minutes): Discuss with Learners about the following Scenario. Ask Learners; “How does total cost change as activity changes”? Note: Ask a series of thought influencing questions. Let them give their suggestions and write them up on the board. Depending upon the learners’ level of sophistication and knowledge, you should get a variety of answers. We assume that the more activity or the more output we produce, the higher total cost will be. But the question is, how much higher? Can we define how cost will change as the level of activity changes? See if any of the learners uses any of the below written words in giving their answer(s). Variables Relationships Linear Expression Facilitator’s Material: Each primary Facilitator should possess a lesson plan, slide deck, course handouts, practical exercise with answer key, case studies and summary sheet containing FM 1-06. Learner’s Material: Learners should possess course handouts, practical exercises, summary sheet containing FM 1-06, case studies, access to Bb and standard classroom supplies. Note: "All required references and technical manuals will be provided by the School House“

Terminal Learning Objective Action: Calculate Total Cost and Per-Unit Cost Given Various Production Volumes Condition: FM Leaders in a classroom environment working individually and as a member of a small group, using doctrinal and administrative publications, self-study exercises, personal experiences, practical exercises, handouts, and discussion. Standard: With at least 80% accuracy (70% for international Learners): Interpret Fixed and Variable Costs Calculate Total and Per-Unit Variable Cost in an Equation Calculate Graph Total and Per-Unit Fixed Costs Show Slide #2: Terminal Learning Objective Facilitator’s Note: Read TLO Action: Calculate Total Cost and Per-Unit Cost Given Various Production Volumes Condition: FM Leaders in a classroom environment working individually and as a member of a small group, using doctrinal and administrative publications, self-study exercises, personal experiences, practical exercises, handouts, and discussion. Standard: With at least 80% accuracy (70% for international Learners): Interpret Fixed and Variable Costs Calculate Total and Per-Unit Variable Cost in an Equation Calculate Graph Total and Per-Unit Fixed Costs Safety Requirements: In a training environment, leaders must perform a risk assessment in accordance with DA PAM 385-30, Risk Management. Leaders will complete a DD Form 2977 DELIBERATE RISK ASSESSMENT WORKSHEET during the planning and completion of each task and sub-task by assessing mission, enemy, terrain and weather, troops and support available-time available and civil considerations (METT-TC). Local policies and procedures must be followed during times of increased heat category in order to avoid heat related injury. Consider the work/rest cycles and water replacement guidelines IAW TRADOC Regulation 350-29. Risk Assessment Level: Low. Environmental Considerations: Environmental protection is not just the law but the right thing to do. It is a continual process and starts with deliberate planning. Always be alert to ways to protect our environment during training and missions. In doing so, you will contribute to the sustainment of our training resources while protecting people and the environment from harmful effects. Refer to FM 3-34.5 Environmental Considerations and GTA 05-08-002 ENVIRONMENTAL-RELATED RISK ASSESSMENT. Evaluation: Learner’s will take both the Principles of Cost Analysis and Management 2 and Principles of Cost Analysis and Management 3 Exam at the end of Week Two and Week Three. Learners must score 80% or higher and International officers must score 70% or higher. Instructional Lead in: There are many views of cost. Wise cost managers will want to understand which key activities and key elements of cost are useful to their decision making processes. What comes to your minds when I say Cost Relationships?

Why Study Cost Relationships? Understanding what drives cost helps to understand how to reduce cost Recognizing cost relationships helps to define what views of cost are useful Show Slide #3: Why Study Cost Relationships? Learning Step Activity 1: Interpret Fixed and Variable Costs Method of Instruction: DSL (large or small group discussion) Facilitator's to Learner Ratio: 2:25 Time of Instruction: 00 hrs. / 15 min. Media: Power Point, Printed Reference Material 21st Century Soldier Competencies: The 21st Century Soldier Competencies are essential to ensure Soldiers and leaders are fully prepared to prevail in complex, uncertain environments. Throughout the lesson discussions, seek opportunities to link the competencies with the lesson content through the Learner’s experiences. Facilitator's Note: Before facilitating this lesson, ask the Learners which of the 21st Century Soldier Competency do they think pertain to this lesson? Facilitate a discussion on the answers given and at the end of the lesson revisit it and see if the Learners still believe their choice are the same. Note: For this lesson these competencies should be talked about. #6. Communication and engagement (oral, written, and negotiation) #7. Critical thinking and problem solving #8. Cultural and joint, interagency, intergovernmental, and multinational competence #9. Tactical and technical competence (full spectrum capable) Facilitator’s Note: Transition into lesson First we should probably ask, why study cost relationships? Understanding what drives cost helps to understand how to reduce cost. Knowing how activities affect cost helps managers target activities to manage cost. Recognizing cost relationships helps to define what views of cost are useful. As we have said before, there are many views of cost. Wise cost managers will want to understand which key activities and key elements of cost are useful to their decision making processes.

What is Cost Relationship? Describes the change in cost that occurs with a change in a variable Examples: As number of students in class increases, total cost of class increases. As snowfall increases, cost of snow removal increases. As number of miles driven increases, total cost of trip increases. Show Slide #4: What is Cost Relationship? Interpret Fixed and Variable Costs (Cont.) Facilitator's Note: This is an animated slide, click on mouse or space bar for transition for examples. Ask learners to mentions several examples before showing all three. Ask Learners; What is cost relationship? Cost relationship describes the change in cost that occurs with a change in a variable. 1st Mouse Click View: Examples: As number of students in class increases, total cost of class increases. As snowfall increases, cost of snow removal increases. As number of miles driven increases, total cost of trip increases.

What is Cost Expression? Communicates a cost relationship using verbal, numerical and mathematical symbols Use plain language rather than variables x, y, z, etc. Use math symbols Add (+) Subtract (–) Multiply (*) Divide (/) Example: Cost of hotel stay = Cost per day * # of days Show Slide #5: What is Cost Expression? Interpret Fixed and Variable Costs (Cont.) Facilitator's Note: Animated slide for example below, before displaying, ask one of the learners to attempt in giving an example. Ask learners; What is Cost Expression? Communicates a cost relationship using verbal, numerical and mathematical symbols Use plain language rather than variables x, y, z, etc. This eliminates the need to define the variable as in “let x stand for number of days”. This also prevents learners from losing sight of what cost they are calculating, and what variable they are solving for. Use math symbols Add (+) Subtract (–) Multiply (*) Divide (/) 1st Mouse Click View: Example: Cost of hotel stay = Cost per day * # of days

Which Cost Expression is Useful? Sometimes it is useful to know Total Cost Relevant cost of all inputs required to achieve desired output Example: Cost of PCAM = instructor pay + course materials + classroom facilities + students’ pay Sometimes it is useful to know Unit Cost Unit cost = Total cost / # units Example: Cost to train one student Show Slide #6: Which Cost Expression is Useful? Interpret Fixed and Variable Costs (Cont.) Facilitator's Note: Facilitate a discussion on; Which cost expression is useful? As we said, understanding cost relationships can help us to define the view of cost that is useful in a given situation. Sometimes it is useful to know Total Cost Relevant cost of all inputs required to achieve desired output Example: Cost of PCAM = instructor pay + course materials + classroom facilities + students’ pay Sometimes it is useful to know Unit Cost Unit cost = Total cost / # units Example: Cost to train one student

LSA #1 Check on Learning Q1. True or False: We should study Cost Relationships to understand what drives cost helps to reduce cost. A1. True Q2. True or False: Cost Relationship describes the change in cost that occurs with a change in a variable. A2. True Q3. True or False: Cost Expression communicates a cost relationship using verbal, numerical and mathematical symbols. A3. True Show Slide #7: LSA #1 Check on Learning Facilitator's Note: Ask check on learning question, facilitate discussion on answers given. Q1. True or False: We should study Cost Relationships to understand what drives cost helps to reduce cost. A1. True A1. False:   Q2. True or False: Cost Relationship describes the change in cost that occurs with a change in a variable. A2. True A2. False: Q3. True or False: Cost Expression communicates a cost relationship using verbal, numerical and mathematical symbols. A3. True A3. False:

LSA #1 Summary Introduced the understanding of what drives cost helps and how to reduce cost, discussed the Cost relationship and cost that occurs with a change in a variable, cost expression relationship using verbal, numerical and mathematical symbols, and which are useful. Show Slide #8: LSA #1 Summary Facilitator's Note: We introduced the understanding of what drives cost helps and how to reduce cost, discussed the Cost relationship and cost that occurs with a change in a variable, cost expression relationship using verbal, numerical and mathematical symbols, and which are useful.

Linear Cost Relationships The simplest cost relationships can be represented by a straight line Variable Costs - Costs that increase in direct proportion with the volume produced or consumed Total variable cost = Upward sloping line Unit variable cost = Horizontal line Example: Cost of materials used increases in direct proportion to number of units produced Show Slide #9: Linear Cost Relationships 2. Learning Step Activity 2: Calculate Total and Per-Unit Variable Cost in an Equation Method of Instruction: DSL (large or small group discussion) Facilitator's to Learner Ratio: 2:25 Time of Instruction: 00 hrs. / 25 min. Media: Power Point, Printed Reference Material The simplest cost relationships can be represented by a straight line Variable Costs - Costs that increase in direct proportion with the volume produced or consumed Total variable cost is represented by an upward sloping line. That is, as number of units increases, total cost increases Unit variable cost is represented by a horizontal line. Regardless of the number of units produced, the cost for each individual unit remains the same. We will look at this graphic representation a little later. Example: Cost of materials used increases in direct proportion to number of units produced

Variable Cost Expression Total Variable Cost = Variable $Cost per Unit * # Units Variable $Cost per Unit = Sum of all Variable inputs Total Variable Cost = Variable $Cost per Unit * # Units Variable $Cost per Unit = Sum of all Variable inputs Show Slide #10: Variable Cost Expression Calculate Total and Per-Unit Variable Cost in an Equation (Cont.) Express total and per-unit variable cost in an equation: Total Variable Cost = Variable $Cost per Unit * # Units Facilitator's Note: This is an animated slide, click on mouse or space bar for transition and explanations for each segment. Mouse Click View: Variable $Cost per Unit = Sum of all Variable inputs. That is, we will add up all of the costs that are variable in nature and that will be our total variable cost.

Variable Cost Example The Smoky Mountain Inn Bed and Breakfast reports the following cost information: Depreciation on building $60,000 per year Maintenance person’s salary $30,000 per year Cleaning person’s salary $24,000 per year Real estate taxes $10,000 per year Laundry service $4.00 per person per night Food $6.00 per person per night What is the unit of output? Which costs will change as output changes? What is the cost expression for variable cost per unit? For Total Variable Cost? Show Slide #11: Variable Cost Example Calculate Total and Per-Unit Variable Cost in an Equation (Cont.) The Smoky Mountain Inn Bed and Breakfast reports the following cost information: Depreciation on building $60,000 per year Maintenance person’s salary $30,000 per year Cleaning person’s salary $24,000 per year Real estate taxes $10,000 per year Laundry service $4.00 per person per night Food $6.00 per person per night Note: We will answer the next few questions on the next slides. 1st question; What is the unit of output? Which costs will change as output changes? What is the cost expression for variable cost per unit? For Total Variable Cost?

Variable Cost Example (Cont.) The Smoky Mountain Inn Bed and Breakfast reports the following cost information: Depreciation on building $60,000 per year Maintenance person’s salary $30,000 per year Cleaning person’s salary $24,000 per year Real estate taxes $10,000 per year Laundry service $4.00 per person per night Food $6.00 per person per night What is the unit of output? “person per night” Which costs will change as output changes? What is the cost expression for variable cost per unit? For Total Variable Cost? Show Slide #12: Variable Cost Example (Cont.) Facilitator’s Note: Calculate Total and Per-Unit Variable Cost in an Equation (Cont.) What is the unit of output? The unit of output is person per night. 2nd question; Which costs will change as output changes? What is the cost expression for variable cost per unit? For Total Variable Cost?

Variable Cost Example (Cont.) The Smoky Mountain Inn Bed and Breakfast reports the following cost information: Depreciation on building $60,000 per year Maintenance person’s salary $30,000 per year Cleaning person’s salary $24,000 per year Real estate taxes $10,000 per year Laundry service $4.00 per person per night Food $6.00 per person per night What is the unit of output? “person per night” Which costs will change as output changes? What is the cost expression for variable cost per unit? For Total Variable Cost? Show Slide #13: Variable Cost Example (Cont.) Facilitator’s Note: Calculate Total and Per-Unit Variable Cost in an Equation (Cont.) The costs that will change as output changes (more people stay for more nights) are laundry service and food. All of the other costs will remain the same regardless of the number of person-nights.

Variable Cost Example (Cont.) What is the cost expression for variable cost per person per night? $son/night What is the cost expression for Total variable cost? $10 per person per night * # person/nights $4 laundry + $6 food = $10 per person-night Show Slide #14: Variable Cost Example (Cont.) Calculate Total and Per-Unit Variable Cost in an Equation (Cont.) Facilitator's Note: Animated slide for example below, before displaying, ask one of the learners to attempt in giving an example 4th and 5th question; 1st Mouse Click View: Q. What is the cost expression for variable cost per unit? $4 laundry + $6 food = $10 per person-night 2nd Mouse Click View: Q. For Total Variable Cost? A. $10 per person per night * # person-nights $10 per person per night * # person-night

Graph of Total Variable Cost $ 750 At 75 units, Cost is $750 At 40 units, Cost is $400 At 10 units, Cost is $100 Show Slide #15: Graph of Total Variable Cost Calculate Total and Per-Unit Variable Cost in an Equation (Cont.) The x-axis represents number of units and the Y axis represents cost. The blue line represents Total Variable Cost. It is an upward sloping line because as number of units increases, total variable cost increases. 1st Mouse Click View: At 10 units, Cost is $100 In our example, cost per unit or person-night is $10. So, if 10 units are produced, total variable cost is $100. $10 per unit * 10 units = $100 2nd Mouse Click View: At 40 units, Cost is $400. That is, $10 per unit * 40 units = $400 3rd Mouse Click View: At 75 units, Cost is $750. Note: have the learners describe the cost expression for this cost: $10 per unit * 75 units = $750. X Axis = Number of units As # units increases, total variable cost increases

Unit Variable Cost Graph (Cont.) Unit Cost = Total Variable Cost/# Units $ Unit cost at 75 units = $750/75 units or $10 per unit Unit cost at 10 units = $100/10 units or $10 per unit Unit cost at 40 units = $400/40 units or $10 per unit Show Slide #16: Graph of Total Variable Cost (Cont.) Calculate Total and Per-Unit Variable Cost in an Equation (Cont.) Here we have a graph of Unit variable cost. The red line represents unit variable cost. The x axis represents number of units produced, the y axis represents cost. As number of units increases, unit variable cost remains the same. 1st Mouse Click View: Unit Cost = Total Variable Cost/# Units Unit cost at 40 units = $400/40 units or $10 per unit 2nd Mouse Click View: Unit cost at 75 units = $750/75 units or $10 per unit X Axis = Number of units As # units increases, Unit variable cost remains the same

LSA #2 Check on Learning Q1. How is Total variable cost represented on the graph? A1. It is represented by an upward sloping line Q2. What is the generic cost expression for Variable cost per unit? A2. Total variable cost / # units Q3. What is the definition of a variable cost? A3. A cost that increases in direct proportion with the volume produced or consumed Q4. What is the generic cost expression for total variable cost? A4. Variable $Cost per Unit * # Units Show Slide #17: LSA #2 Check on Learning Facilitator’s Note: Ask check on learning question, facilitate discussion on answers given. Q1. How is Total variable cost represented on the graph? A1. It is represented by an upward sloping line Q2. What is the generic cost expression for Variable cost per unit? A2. Total variable cost / # units Q3. What is the definition of a variable cost? A3. A cost that increases in direct proportion with the volume produced or consumed Q4. What is the generic cost expression for total variable cost? A4. Variable $Cost per Unit * # Units

LSA #2 Summary During this lesson, we discussed variable expression in an equation using examples and graphs. Show Slide #18: LSA #2 Summary Facilitator’s Note: Announce to the learners; during this lesson, we discussed variable expression in an equation using examples and graphs.

Linear Cost Relationships Fixed Costs - Costs that do not change with the volume produced or consumed Total fixed cost = Horizontal line Unit Fixed Cost is non-linear Example: The cost of the instructor remains the same regardless of the number of students in the class Show Slide #19: Linear Cost Relationships 3. Learning Step Activity 3: Calculate Graph Total and Per-Unit Fixed Costs Method of Instruction: DSL (large or small group discussion) Facilitator's to Learner Ratio: 2:25 Time of Instruction: 01 hrs. / 00 min Media: Power Point, Printed Reference Material Express total and per-unit fixed costs in an equation. Fixed Costs - Costs that do not change with the volume produced or consumed. Fixed Costs: Total Cost = Horizontal Line. No matter how many units are produced the total fixed cost, by definition, will not change. Therefore it will be represented by a horizontal line. Unit Fixed Cost is non-linear. We will look at this a little later. Example: The cost of the instructor remains the same regardless of the number of students in the class

Fixed Cost Expression Total Fixed $Cost = Sum of all Fixed Inputs Fixed $Cost per Unit = Total Fixed $Cost / # Units Total Fixed $Cost = Sum of all Fixed Inputs Fixed $Cost per Unit = Total Fixed $Cost / # Units Show Slide #20: Calculate Graph Total and Per-Unit Fixed Costs Express total and per-unit fixed costs in an equation. Facilitator's Note: Animated slide for example below, before displaying, ask one of the learners to attempt in giving an example Total Fixed $Cost = Sum of all Fixed Inputs. That is, we will add up all of the costs that are fixed in nature and that will be our total fixed cost. Fixed $Cost per Unit = Total Fixed $Cost / # Units

Fixed Cost Example The Smoky Mountain Inn Bed and Breakfast reports the following cost information: Depreciation on building $60,000 per year Maintenance person’s salary $30,000 per year Cleaning person’s salary $24,000 per year Real estate taxes $10,000 per year Laundry service $4.00 per person per night Food $6.00 per person per night What is the unit of output? Which costs will NOT change as output changes? What is the cost expression for Total Fixed Cost? For Fixed Cost per Unit? Show Slide #21: Fixed Cost Example Calculate Graph Total and Per-Unit Fixed Costs (Cont.) We have the same example: The Smoky Mountain Inn Bed and Breakfast reports the following cost information: Depreciation on building $60,000 per year Maintenance person’s salary $30,000 per year Cleaning person’s salary $24,000 per year Real estate taxes $10,000 per year Laundry service $4.00 per person per night Food $6.00 per person per night What is the unit of output? Which costs will NOT change as output changes? What is the cost expression for Total Fixed Cost? For Fixed Cost per Unit?

Fixed Cost Example (Cont.) The Smoky Mountain Inn Bed and Breakfast reports the following cost information: Depreciation on building $60,000 per year Maintenance person’s salary $30,000 per year Cleaning person’s salary $24,000 per year Real estate taxes $10,000 per year Laundry service $4.00 per person per night Food $6.00 per person per night What is the unit of output? “per person per night” Which costs will NOT change as output changes? What is the cost expression for Total Fixed Cost? For Fixed Cost per Unit? Show Slide #22: Fixed Cost Example (Cont.) Calculate Graph Total and Per-Unit Fixed Costs (Cont.) What is the unit of output? The unit of output is (still) person-night. The costs that will NOT change as output changes (more people stay for more nights) are Depreciation on the building, the maintenance and cleaning staff salaries, and the real estate taxes. These costs will remain the same regardless of the number of person-nights. The cost expression for Total Fixed Cost is: $60,000 depreciation + $30,000 maintenance salary + $24,000 cleaning salary + $10,000 taxes The cost expression for Fixed Cost per Unit is $124,000 / # person-nights

Fixed Cost Example (Cont.) The Smoky Mountain Inn Bed and Breakfast reports the following cost information: Depreciation on building $60,000 per year Maintenance person’s salary $30,000 per year Cleaning person’s salary $24,000 per year Real estate taxes $10,000 per year Laundry service $4.00 per person per night Food $6.00 per person per night What is the unit of output? “per person per night” Which costs will NOT change as output changes? What is the cost expression for Total Fixed Cost? For Fixed Cost per Unit? Show Slide #23: Fixed Cost Example (Cont.) Calculate Graph Total and Per-Unit Fixed Costs (Cont.) 2. Which costs will NOT change as output changes? The costs that will NOT change as output changes (more people stay for more nights) are Depreciation on the building, the maintenance and cleaning staff salaries, and the real estate taxes. These costs will remain the same regardless of the number of person-nights.

Fixed Cost Example (Cont.) What is the cost expression for Total Fixed Cost? $60,000 depreciation + $30,000 maintenance salary + $24,000 cleaning salary + $10,000 taxes = $124,000 What is the cost expression for Fixed Cost per Unit? $124,000 / # person-nights What is the cost expression for Total Fixed Cost? $60,000 depreciation + $30,000 maintenance salary + $24,000 cleaning salary + $10,000 taxes = $124,000 What is the cost expression for Fixed Cost per Unit? $124,000 / # person/nights Show Slide #24: Fixed Cost Example (Cont.) Calculate Graph Total and Per-Unit Fixed Costs (Cont.) Facilitator's Note: Animated slide for example below, before displaying, ask one of the learners to attempt in giving an example 3. What is the cost expression for Total Fixed Cost? The cost expression for Total Fixed Cost is: $60,000 depreciation + $30,000 maintenance salary + $24,000 cleaning salary + $10,000 taxes The cost expression for Fixed Cost per Unit is $124,000 / # person-nights For Fixed Cost per Unit?

Graph of Total Fixed Cost At 75 units, Total Fixed Cost is $124,000 At 40 units, Total Fixed Cost is $124,000 At 10 units, Total Fixed Cost is $124,000 Show Slide #25: Graph of Total Fixed Cost The green line represents total fixed cost. Again, the x-axis represents number of units produced and the y axis represents cost. At 10 units, Total Fixed Cost is $124,000 Facilitator's Note: Animated slide for example below 1st Mouse Click View: At 40 units, Total Fixed Cost is $124,000 2nd Mouse Click View: At 75 units, Total Fixed Cost is $124,000 X Axis = Number of units As # units increases, Total Fixed cost remains the same

Graph of Unit Fixed Cost Unit Cost = Total Fixed Cost/# Units At 10 units, Unit Fixed Cost = $124,000/10 units or $12,400 per unit At 40 units, Unit Fixed Cost = $124,000/40 units or $3,100 per unit At 75 units, Unit Fixed Cost = $124,000/75 units or $1,653 per unit $12,400 Show Slide #26: Graph of Unit Fixed Cost As we stated earlier, fixed cost per unit is NOT linear. The purple concave downward curve on the graph represents fixed cost per unit. Unit Fixed Cost = Total Fixed Cost/# Units What is Unit Fixed cost if only one unit (person-night) is sold? $124000/1 or $124,000 At 10 units, Unit Fixed Cost = $124,000/10 units or $12,400 per unit 1st Mouse Click View: Blank slide 2nd Mouse Click View: At 40 units, Unit Fixed Cost = $124,000/40 units or $3,100 per unit 3rd Mouse Click View: The more units are sold, the lower fixed cost per unit. This is called “spreading the fixed cost”. At 75 units, Unit Fixed Cost = $124,000/75 units or $1,653 per unit $3,100 $1,653 X Axis = Number of units As # units increases, Unit Fixed cost decreases

Demonstration Problem A vehicle repair shop incurs an average parts cost per repair of $220. Shop rent is $5,000 per month. Staff salaries are $5,000 per month and technicians earn a commission on repairs that averages $200 per repair. Which costs are fixed? Which are variable? What is total cost of 100 repairs? 200 repairs? What is unit cost for 100 repairs? 200 repairs? Show Slide #27: Demonstration Problem Calculate total cost and per-unit cost for a given production volume. A vehicle repair shop incurs an average parts cost per repair of $220. Shop rent is $5,000 per month. Staff salaries are $5,000 per month and technicians earn a commission on repairs that averages $200 per repair. Which costs are fixed? Which are variable? What is total cost of 100 repairs? 200 repairs? What is unit cost for 100 repairs? 200 repairs?

Demonstration Problem (Cont.) A vehicle repair shop incurs an average parts cost per repair of $220. Shop rent is $5,000 per month. Staff salaries are $5,000 per month and technicians earn a commission on repairs that averages $200 per repair. What is unit cost for 100 repairs? 200 repairs? Unit cost = Total cost / # repairs What is unit cost for 100 repairs? 200 repairs? Unit cost = Total cost / # repairs Total @100 repairs $52,000 / 100 repairs = $520 Total @200 repairs $94,000 / 200 repairs = $470 What is total cost of 100 repairs? 200 repairs? Total cost= $420 per repair * # repairs + $10,000 $420 per repair*100 repairs+$10,000 = $52,000 $420 per repair*200 repairs+$10,000 = $94,000 What is unit cost for 100 repairs? 200 repairs? Unit cost = Total cost / # repairs Total @100 repairs $52,000 / 100 repairs = $520 What is total cost of 100 repairs? 200 repairs? Total cost= $420 per repair * # repairs + $10,000 $420 per repair*100 repairs+$10,000 = $52,000 Which costs are fixed? Shop Rent $5,000 Staff Salaries 5,000 Total Fixed $10,000 Which costs are variable? Parts per repair $220 Commission per repair 200 Total $420 What is total cost of 100 repairs? 200 repairs? Total cost= $420 per repair * # repairs + $10,000 $420 per repair*100 repairs+$10,000 = $52,000 Show Slide #28: Demonstration Problem (Cont.) Facilitator’ Note: Questions blanked out with scenario still displayed to guide the demonstration questions are answered one by one. 1st Mouse Click View: A vehicle repair shop incurs an average parts cost per repair of $220. Shop rent is $5,000 per month. Staff salaries are $5,000 per month and technicians earn a commission on repairs that averages $200 per repair. 2nd Mouse Click View: Which costs are fixed? Shop Rent $5,000 Staff Salaries 5,000 Total Fixed $10,000 3rd Mouse Click View: Which costs are variable? Parts per repair $220 Commission per repair 200 Total $420 4th Mouse Click View: What is total cost of 100 repairs? 200 repairs? First, let’s think about the cost expression for total cost. It is: cost per repair * # repairs + fixed cost Total cost= $420 per repair * # repairs + $10,000 5th Mouse Click View: Total cost at 100 repairs is $420 per repair*100 repairs+$10,000 = $52,000 6th Mouse Click View: Total cost at 100 repairs is $420 per repair*200 repairs+$10,000 = $94,000 7th Mouse Click View: What is unit cost for 100 repairs? 200 repairs? Again, let’s think about the cost expression for unit cost. It is: Unit cost = Total cost / # repairs 8th Mouse Click View: Unit cost for 100 repairs = Total cost at 100 repairs $52,000 / 100 repairs = $520 per repair 9th Mouse Click View: Total cost at 200 repairs $94,000 / 200 repairs = $470 per repair Notice that cost per repair decreases as number of repairs increases. That is another example of spreading the fixed cost. However, the cost per repair will never go below $220 because that is the variable cost, and that cost will be incurred for each repair.

Demo Check on Learning Q1. What happens to total variable cost as number of units produced increases? A1. It increases (linear, upward sloping) Q2. What happens to unit fixed cost as number of units produced increases? A2. It decreases (spread over more units) Show Slide #29: Demonstration Check on Learning Q1. What happens to total variable cost as number of units produced increases? A1. It increases (linear, upward sloping) Q2. What happens to unit fixed cost as number of units produced increases? A2. It decreases (spread over more units) Facilitator’s Note: Pass out the HO for Calculate Total Cost and Per Unit Cost and have learners quickly analyze and put their answer. Followed by facilitator’s input to the solution. Have the learners use the blank graph in the HO to illustrate a cost relationship where the total fixed cost is $20. Facilitator’s Note: After the check on learning session for the demonstration, continue with check on learning for both the LSA and entire lesson.

LSA #3 Check on Learning Q1. How is Total fixed cost represented on the graph? A1. As a horizontal line. As number of units increases, total fixed cost remains the same. Q2. How is Unit fixed cost represented on the graph? As a concave downward curve. A2. As number of units increases, unit fixed cost decreases. Q3. What is the definition of a fixed cost? A3. A cost that does not change with the volume produced or consumed. Q4. What is the generic cost expression for fixed cost per unit? A4. Total Fixed $Cost / # Units. Show Slide #30: LSA #3 Check on Learning Q1. How is Total fixed cost represented on the graph? A1. As a horizontal line. As number of units increases, total fixed cost remains the same. Q2. How is Unit fixed cost represented on the graph? As a concave downward curve. A2. As number of units increases, unit fixed cost decreases. Q3. What is the definition of a fixed cost? A3. A cost that does not change with the volume produced or consumed. Q4. What is the generic cost expression for fixed cost per unit? A4. Total Fixed $Cost / # Units.

LSA #3 Summary During this lesson, we went over and discussed the graph of unit fixed cost and total per-unit fixed costs in an equation using examples. We further went into and conducted via a demonstration problem the calculation for total cost and per-unit cost for a given production volume. Show Slide #31: LSA #3 Summary Facilitator's Note: During this lesson, we went over and discussed the graph of unit fixed cost and total per-unit fixed costs in an equation using examples. We further went into and conducted via a demonstration problem the calculation for total cost and per-unit cost for a given production volume.

TLO Summary Action: Calculate Total Cost and Per-Unit Cost Given Various Production Volumes Condition: FM Leaders in a classroom environment working individually and as a member of a small group, using doctrinal and administrative publications, self-study exercises, personal experiences, practical exercises, handouts, and discussion. Standard: With at least 80% accuracy (70% for international Learners): Interpret Fixed and Variable Costs Calculate Total and Per-Unit Variable Cost in an Equation Calculate Graph Total and Per-Unit Fixed Costs Show Slide #32: TLO Summary Facilitator’s Note: Read TLO Action: Calculate Total Cost and Per-Unit Cost Given Various Production Volumes Condition: FM Leaders in a classroom environment working individually and as a member of a small group, using doctrinal and administrative publications, self-study exercises, personal experiences, practical exercises, handouts, and discussion. Standard: With at least 80% accuracy (70% for international Learners): Interpret Fixed and Variable Costs Calculate Total and Per-Unit Variable Cost in an Equation Calculate Graph Total and Per-Unit Fixed Costs “Or” Facilitator's at this time, have one learner from each group to explain the most important take away to them from this lesson. Facilitate a discussion on each answer.