Chapter 9 Continued Understanding Fixed vs. Variable Costs

Three Kinds of Costs  Start up Costs  Variable Costs  COGS  Other Variable Costs – Packaging, Shipping, Commission  Fixed Costs

Start Up Costs  Start up costs occur only when a business is launched. Example: Loan from a bank or friend.  Cash Reserves (3 Months of Fixed Costs)

Fixed Costs  Do not change with sales  Are not included in the COGS or COSS  Are costs a business must cover to keep a roof over it’s head and stay in operation.  Also called “Overhead” or “Fixed Operating Costs”

USAIIRD  Utilities (gas, electric, telephone, Internet Service)  Salaries  Advertising  Insurance  Interest  Rent  Depreciation

Depreciation  Save money that will be needed to replace expensive equipment. Examples: Cars, Trucks, Computers,

Up or Down?  How do you think the following costs would react if you made and sold more bicycles?  Wheels?  Breaks?  Salesperson Commission?  Heating Costs for Building?  Interest on money you borrowed to start your co. ?  Shipping the bikes to stores?

Economies of Scale  The quantity of an item you buy or sell is called volume.  Purchase in volume to get better prices  Example: Cosco

Cash Reserve  3 Months of fixed costs in the bank before you open your business.

Try This…..  Variable vs. Fixed Worksheet