Business Development Services 1 What are your costs? Session 10

Business Development Services 2  Discuss the difference between price and cost  Define fixed and variable costs  Calculate fixed and variable costs for a sample business  Calculate break-even point  Look at price from a financial or cost perspective  Calculate fixed and variable costs for your business Session objectives

Business Development Services 3  Cost: a business expense, or the money that goes out of your business to buy something for your business (e.g. raw materials, labour, rent, office supplies, etc.) Costs can be fixed or variable.  Price: an amount of money for which something is bought or sold (e.g. the selling price of your product, or something you buy for your business). What’s the difference between price & cost?

Business Development Services 4  Variable costs are costs that are directly related to producing your product/service.  As sales go up, so do variable costs. As sales go down, so do variable costs. Variable costs

Business Development Services 5 Variable costs

Business Development Services 6  Supplies or raw material (items or ingredients needed to produce your product/service)  Labour (to make the product or deliver the service)  Transportation (e.g. using a vehicle in a service business)  Packaging/shipping  Fees that a business pays when customers use debit or credit cards Examples of variable costs

Business Development Services 7  After you pay your variable costs, what’s left over?  Contribution margin = the amount left over after paying variable costs…that can be used to pay the rest of your costs (fixed costs)

Business Development Services 8  Contribution margin is positive. E.g. $2.00  Contribution margin is zero. E.g. $0.00  Contribution margin is negative. E.g. ($2.00) Good news or bad news?

Business Development Services 9 Price (per unit) - Variable costs (per unit) = Contribution margin (per unit) Contribution margin

Business Development Services 10  Fixed costs are expenses that stay the same no matter how much or how little you sell  As sales increase, fixed costs stay the same. As sales decrease, fixed costs stay the same. Fixed costs

Business Development Services 11 Fixed costs © 2013 SEED Winnipeg, Inc. All rights reserved 15

Business Development Services 12  Labour can be both a variable cost or a fixed cost  It depends on the kind of employment relationship. What about labour?

Business Development Services 13  The break-even point is the minimum sales a business must make to cover fixed and variable costs, without losing or making money.  Any income above the break-even point is profit.  Anything below the break-even point is a loss. Break-even point

Business Development Services 14

Business Development Services 15  A successful business must have sales that are higher than the break-even point, so the business can:  Provide investors with a return on investments  Keep money in the business to help it grow (e.g. more advertising, new website, better equipment, etc.)  Save for years when there may be low sales Break-even point

Business Development Services 16  You will calculate your break-even point in units.  This is the number of units you’ll need to sell to break even. You’ll need to know:  Fixed costs  Contribution margin  (selling price per unit – variable cost per unit) Information you need to calculate break-even point