1. 5.4 Costs

2. Costs Objectives What costs do business incur?
How can costs be classified;
Direct or indirect.
Variable or fixed.
Break-even analysis

3. What costs do business incur?
Make a list of all the costs that you think Cambridge College incurs.
What outputs does Cambridge College have?

4. Direct and indirect costs
Direct costs – costs that can be clearly identified with each unit of production.
Indirect costs – costs that cannot be identified with each unit of production. (These can also be called overhead costs).
Sort your list of costs into either; direct or indirect.

5. Fixed and variable costs
Fixed costs – costs that do not change with the level of output (production).
Variable costs – costs that change with increasing or decreasing output (production).
Sort your list of costs into variable or fixed.

6. Fixed and variable costs
Teacher’s note: The information provided in the summary panel for fixed and variable costs could spark a discussion on what other costs might fall into this joint category.

7. Formulas Total Variable Costs = Variable cost per unit * Q
TVC = VC * Q
Total Costs = Fixed Costs + Total Variable Costs
TC = FC + TVC
Revenue = Price * Q
R = PQ

8. THE Formula Profit or Loss = Revenue – Total Costs
If R > TC = profit
If R< TC = loss

9. Case study: Suzy’s Driving School
Suzy Clarke has decided to set up her own driving school. She has the following costs:
Repayments: £30 per week
Wages: £250 per week
Maintenance: £5 per lesson
Petrol: £10 per lesson
Insurance and tax: £50 per week
Teacher’s note: As the students are going to need this information in the following slides, it is worth getting them to record these figures at this stage.
Advertising: £30 per week
Phone bill: £1 per lesson
She charges £25 for a 30 minute lesson and can do no more than 60 lessons a week.

10. Case study: Suzy’s Driving School
Y axis 0 to 1500 pounds, X axis 0 to 60 lessons
What are the fixed costs?
Add the fixed costs together and graph it.
What are the variable costs?
Add the variable costs together. You will need to find the Total Variable Costs at two points; suggest 0 lessons and 40 lessons.

14. Break Even Graph for Suzy’s Driving School

15. Break Even Analysis: Suzy’s Driving School
The break-even point (BEP) is where no profit or loss is made (R=TC).
What is the BEP for Suzy?
Assume that market research suggests that at 25 pound per lesson; demand should be for 50 lessons.
The difference between the expected sales level (or actual) and the BREAK EVEN POINT is the MARGIN OF SAFETY.

16. Break Even Graph for Suzy’s Driving School

17. Calculating the BEP Contribution = P-VC BEQ = FC/Contribution
Try it for Suzy;
FC = 360
VC = 16
Price = 25

18. Draw a break even chart for the following:
Fixed Costs = $10,000
Variable Cost = $10
Selling price = $15
Maximum production quantity = 3,000
What is the margin of safety if current is 2,200.

19. Pages 512 and 513
Activity 28.4 Q1
Activity 28.3 all questions

20. Who wants to be an A* student?
Answers:
Balances its costs and revenue
Makes a profit
BEP
Units of production
Profit
No effect
Direct costs
Raw materials
Margin of safety
Fixed costs ÷ contribution per unit

21. Break Even Analysis Page 512 Make notes on Paper 2 Nov 11
Break-even analysis further uses
Evaluation of break-even analysis
Paper 2 Nov 11
2aii, 2bi, 2bii
Extension: Have a look at 1c.

22. Break Even Analysis Warning:
Break-even assumes that the factory, school, machinery, etc. already exists. Other investment appraisal techniques must be used to include these in the analysis.

23. Plenary Objectives What costs do business incur?
How can costs be classified;
Direct or indirect.
Variable or fixed.
Break-even analysis