INDUSTRIAL STUDIES EAT 221 Unit 7 - Finance

INDUSTRIAL STUDIES Introduction Types of cost –Direct, Indirect –Fixed, variable, total Relationship between Revenue/Profit and cost Break Even Analysis –Calculation –Chart

INDUSTRIAL STUDIES Types of Costs Direct Costs – cost’s that can be identified with a particular product or process eg. raw materials, packaging and direct labour These are normally fixed costs Indirect Costs or overheads – affects the whole business e.g. rent, insurance, salaries of office staff These are normally variable costs

INDUSTRIAL STUDIES Revenue and Profit Total Revenue - ‘The amount of money a company receives from selling its product’ Total revenue = Quantity sold x Price Profit - ‘The difference between revenue and costs’ Profit = Total revenue – total costs

INDUSTRIAL STUDIES Types of Costs Fixed Costs - Costs that stay the same for all levels of output e.g. Rent, insurance heating

INDUSTRIAL STUDIES Types of Costs Variable Costs - Costs of production which increase directly as output rises

INDUSTRIAL STUDIES Types of Costs Total Cost = Fixed + Variable

INDUSTRIAL STUDIES Types of Costs EXAMPLE : Abrams and Lyons are a small manufacturer which assemble electric kettles. They lease a factory in Southampton and employ 38 workers. Their fixed costs are £100,000 and variable costs are £2.50 per kettle. a) Draw a table showing output, fixed costs, variable costs (use a range from ,000 in divisions of ten thousand) Plot your figures on a graph b) If variable costs rise to £3.50,what will happen to total cost if output is : (i)Zero (ii)50,000

INDUSTRIAL STUDIES Types of Costs

INDUSTRIAL STUDIES Abram and Lyons example (a)

INDUSTRIAL STUDIES Types of Costs EXAMPLE part (b)- variable cost £3.50 OUTPUTFIXEDVARIABLETOTAL (units)COST

INDUSTRIAL STUDIES Abram and Lyons example (b)

INDUSTRIAL STUDIES Break Even Analysis Break even point - ‘The level of sales or output, where total costs are exactly the same as total revenue’ Companies often want to know how much they want to produce or sell to break even It is possible to calculate the ‘break even’ point if a firm knows the value of its costs and the price it can charge in the market place

INDUSTRIAL STUDIES Break Even Analysis Why calculate the break even point? Know in advance the level of output needed to ‘break even’ See how changes in output affect profit See how changes in cost affect the break even point and profit Calculate the level of output needed to reach a target rate or profit

INDUSTRIAL STUDIES Break Even - Example A small producer makes wrought iron park benches in a foundry. The fixed costs (FC) are £60,000 and variable costs are £40 per bench. He sells the benches for £100. Calculate the breakeven output.

INDUSTRIAL STUDIES Break Even - Example Let q= quantity of benches needed to break even Total cost (TC) = Fixed cost + variable cost Total Cost (TC) = £60,000+£40q …………….. eq. 1 Total Revenue (TR) = £100 x q = £100q …….. eq.2

INDUSTRIAL STUDIES Break Even - Example Breakeven occurs when TC=TR £60,000 + £40q = £100q £60,000 = £60q q = £60,000 = 1000 units £60

INDUSTRIAL STUDIES Break Even Chart

INDUSTRIAL STUDIES Next week Reading week / complete assignment