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Costs & Revenues Pages Topic 3.2 (SL)

3 Better go home and make a net than dive for fish at random. Chinese Proverb

4 Assessment Objectives: AO1 Demonstrate knowledge and understanding AO2 Demonstrate application and analysis AO3 Demonstrate synthesis and evaluation AO4 Demonstrate a variety of appropriate skills

5 Content Objectives: AO2:To apply and analyse the various types of costs using examples – fixed costs, variable costs, semi-variable costs, direct costs, indirect/overheads the various types of costs using examples – fixed costs, variable costs, semi-variable costs, direct costs, indirect/overheads Total revenue and revenue streams using examples Total revenue and revenue streams using examples

6 Language Objectives: LO1 Reading informative texts: determine two or more central ideas of a given case study LO2 Writing: write arguments to support claims using evidence from a case study LO3 Listening: build on others’ ideas and participate in discussions. LO4 Speaking: make strategic use of digital media textual and other interactive elements in presentations.

  refers to the expenditure in producing an item (paid by producer) whereas price refers to the amount the item is sold for (paid by customer). 7 Types of costs (AO2) Types of costs (AO2)

Fixed Costs ( 固定成本 )  Fixed costs are the costs of production that a business has to pay regardless of its output i.e. even when output = zero  Examples: rental, interest payments on bank loans, advertising, market research, managers' salaries, stationery, accountancy fees etc  FC can change but it's independent of output.  See TB p231 for graph 8

Variable Costs ( 可变成本 )  Costs of production that change in direct proportion to the level of output  If level of output = zero, there will be no variable costs.  Total costs = Total FC + Total VC  Examples: raw materials, commission, product packaging  Refer to TB p231 for graph  Note: TC line starts at the same point as FC. 9

Semi Variable Costs  Contain an element of both FC & VC  Change only when production exceed a certain level of output  More realistic approach in business context  Examples: mobile phone bills has a minimum monthly component and a variable component; overtime pay for hourly-rated staff; sales staff earns a minimum monthly salary plus commission based on units sold. 10

Direct Costs ( 直接成本 )  DC is related to a single product or project i.e. if that product line or project is withdrawn, DC = zero.  Include VC such as raw materials.  Catering costs for non-budget airlines e.g. EVA air is classified as VC since all passengers onboard are entitled to the food and drinks  Catering costs for budget air e.g. Airasia is DC since passengers have to pay for their food and drinks separately, not included in airfare. 11

Direct Costs  DC is related to a single product or project i.e. if that product line or project is withdrawn, DC = zero.  Include VC such as raw materials.  Catering costs for non-budget airlines e.g. EVA air is classified as VC since all passengers onboard are entitled to the food and drinks  Catering costs for budget air e.g. Airasia is DC since passengers have to pay for their food and drinks separately, not included in airfare. 12

Costs formulae (Box 3.2a)  Total cost (TC)TC = TFC + TVC  Total variable costs (TVC)TVC = AVC X Q  Total fixed costs (TFC) TFC = AFC X Q Notes:  Average costs = AFC + AVC  AFC = TFC divide by level of output (Q)  AVC = TVC divide by level of output (Q)  AC can be reduced by engaging in larger scale of production  Reason: TFC is constant but is spread over an increasing Q! 13

 Revenue refers to the money coming into a business, usually from the sale of goods and/or services (known as sales revenue).  Formula: Sales revenue = Price X Quantity sold  Total Revenue: TR = P (Price) X Q (Qty sold)  Average Revenue: AR = TR/Q  Since Price: P = TR/Q so AR = Price  (revenue and profit) 14 Revenue (AO2) Revenue (AO2)

Revenue streams ( 收入来源 )  Revenue: comes from the sale of goods and services.  Revenue streams: money that come from other means.  Examples are given in the following slides 15

Revenue streams  Advertising revenue: Google, Twitter, Facebook rely heavily on advertising revenue as a revenue stream i.e. advertisers pay based on cost per click or number of times the advert is displayed  Transaction fees: Low cost airlines tend to charge customers a commission when customers pay their bookings via credit card transactions.  Franchise costs and royalties: Franchisees pay a fee to their franchisor to purchase the right to use its brand name, logos and trademarks. 16

Revenue streams  Subscription fees ( 申购费 ): charges imposed on customers who use a good or service based on a formal agreement. Example: Fitness, Golf club membership  Merchandise: service providers in the entertainment industry sells food, beverage, limited edition souvenirs etc  Subventions ( 资助 ): subsidies offered to certain businesses to help reduce costs of production e.g. schools & hospitals  Other forms include sponsorship revenue, dividends, donations and interest earnings 17

 Cost control ( 成本控制 ) measures such as cost cutting to remain competitive  Cost cutting ( 削减成本 ) is justifiable if it leads to improved efficiency and profitability i.e. ethical considerations in cost cutting strategies 18 Costs, Revenues & CUEGIS