1. Year 10 Business Estimating Costs Mr Nicholls

2. Objectives  To consider the importance of being able to estimate costs within a specific business.

3. To start with…how much to make? $156 (£95) $2,700 (£1,644) £0.02 £40

4. In business…  Think about a company like Walkers Crisps – initially it would seem like a win win business idea – think about it:  Walkers Crisps = 35p for 30g bag.  Potatoes = 33p Per Kilo  Therefore – the potato used in one bag of crisps = 1p.  Flavourings, oil, salt = 1p  Packaging etc = 1p  Total Cost = 3p per bag.

5. However…  Clearly it’s not that simple! Walkers also need to consider:  Factory Rent/Mortgage  Cost of Machinery  Salaries  Marketing/Advertising/Promotion  Once again therefore we end up returning to the importance of considering Fixed and Variable Costs – but what does each mean?

6. Variable Costs  Remember – these are the costs that change with the quantity sold and made. As such – they are direct costs as they relate directly to the product being made.  So if a company needs to make more products, they have to buy more materials, therefore the costs of purchasing will increase.  Variable Costs could be:  Raw Materials – potatoes for making crisps, cocoa for making chocolate.  Bought In Components – spark plugs for making cars.  Energy – gas for cooking.  Piece Rate Labour – people who are paid per item made will have to be paid more if they make more!

7. Fixed Costs…  These costs are the ones that don’t change as output changes as they’re indirect costs – as such they are not directly related to the products being made.  As such, a company can make as many products as they like, but these costs will remain the same at all times.  Fixed costs could be:  Salaries of permanent staff.  Rent and Council Tax  Marketing spending  Machinery and Equipment

8. Think about it…  What might the fixed costs and variable costs be of the following businesses:  A Topshop Store?  Manchester United (or any other fuseball team of your choosing)?  A kebab shop? Type Of BusinessFixed CostsVariable Costs TopshopRent, wages, security, insurance, lighting, heating, décor. Clothes, bags, damage, theft. Manchester UnitedWages, salaries, maintenance.Programme, tickets, pies, food, beer, drinks. A Kebab ShopRent, wages, lighting, heating, insurance, décor. Meat, bread, salad, potatoes, energy, bags, packaging.

9. Total Costs  Once we’ve worked out our Fixed and Variable Costs, we can work out our total costs.  So – if we know that fixed costs (per week) to open a Kebab Shop will be £1,200, and variable costs will be £0.80 per kebab – total costs can be calculated based on our forecast sales.  If sales = 600  600 = (600x£0.80) = £480 (VC) + £1,200 (FC) = £1,680 (TC)  This will then need to be compared to revenue to ensure income is higher than outgoings.

10. Practice…  Text Books page 98 please – read through the section titled Practice Questions and then answer the questions on page 99.