1. 1 EUE43E: ‘Trade & Commerce’ Understanding Cost Behaviour Break-Even & Pricing Policy Robert J. Williams

2. Differences in Industry Profitability... 2

3. 3 Introduction l Understand the categorisation & behaviour of costs and the implications for decision making based on: 1. Categorisation 1 based on ease of allocation 2. Categorisation 2 based on behaviour with changing levels of production 3. Categorisation 3 based on behaviour at the margins of production

4. Categorising Costs 1 1. Direct Costs 2. Indirect Costs 4

5. 5 Manufacturing Account Partial absorption costing Direct Costs

6. 6 Profit & Loss Account Full absorption costing Indirect Costs

7. 7 Thus can calculate Gross Profit eg Gema l Sales Revenue per Doll £1.60 Less l Allocatable Costs per Doll£1.04 (partial absorption) Gross Profit (margin) per Doll£0.56 (contribution) Gemas sold38,250 Gross profit from Gema 38,250 x £0.56 = £21,195 Gema ‘contributes’ £21,195 to cover the non- allocatable indirect or overhead costs

8. 8 Manufacturing Account

9. 9 Costs categorised on the basis of their cost behaviour with changing production levels l variable costs vary in direct proportion to the level or scale of production/operation eg? Categorising Costs 2

10. 10 Manufacturing Account Variable Costs

11. 11 Variable Cost Behaviour

12. 12 Variable Cost/Doll by Production Level

13. 13 Costs categorised on the basis of behaviour with changing production levels l fixed costs do not vary in direct proportion to the level or scale of production but may vary by a large increment when the scale of activity increases by large amounts eg need to expand the factory eg? Categorising Costs 2

14. 14 Manufacturing Account

15. 15 Profit & Loss Account

16. 16 Fixed Cost Behaviour

17. 17 Fixed Costs/Doll by Production Level

18. 18 Categorising Costs 2 Costs categorised on the basis of behaviour with changing production levels l semi-variable contain both fixed & variable elements eg? u business vehicles: ownership costs; tax, insurance - fixed u use costs; fuel, oil - variable u what about depreciation? see graph

19. 19 Semi - Variable Behaviour Fixed Cost + Variable Cost Total Cost

20. 20 Semi-Variable costs/doll by Production Level

21. 21 Costs categorised on the basis of behaviour with changing production levels l stepped-fixed behave as fixed costs over a specific but limited range of activity then change dramatically eg? u supervision costs u some mechanisation costs see graph Categorising Costs 2

22. 22 Stepped Fixed Behaviour Supervision Costs

23. 23 Stepped Fixed Cost/Doll by Production Level

24. 24 Categorising Costs 3: Marginal Costs

25. 25 Total Cost Behaviour

26. 26 Total Costs/Doll by Production Level

27. 27 Total Costs Behaviour? l How will the cost per doll change with increased production? l What do we call this phenomenon? l Does this principal invariably work? l Can you think of a wider impact of this phenomenon?

28. 28 Why do women live longer than men?

29. 29

30. 30 EUE43E: ‘Trade & Commerce’ Understanding Break-Even Robert J. Williams

31. 31 Break - Even Chart 1 Fixed Costs Variable Costs Total Costs Total Sales Revenue Profit Break-Even

32. 32 Break - Even Chart 2 Fixed Costs Variable Costs Total Costs Sales Revenue Profit Loss Break-Even

33. 33

34. 34 EUE43E: ‘Trade & Commerce’ Product Pricing Robert J. Williams

35. 35 Pricing l The Accountants approach.... cost plus what you think a competitive market will bear? consider: u price sensitivity (elasticity) of demand u marketing efforts u customer loyalty effects u product differentiation (marketing) cost minus u penetration pricing with loss leaders

36. 36 Demand Price Inelastic Price per Doll (£) Quantity Demanded (Dolls) P2P2 Q2Q2 P1P1 Q1Q1

37. 37 Demand Price Elastic P1P1 Q1Q1 P2P2 Q2Q2 Price per Doll (£) Quantity Demanded (Dolls)

38. What you need to do… l Period 5 decisions by 12.00 & Period 6 decisions by 16.00 l In e-mail ‘subject’ put Team Number, Team Name and Decision Number (D2) l Put all Results onto Bosscat Business Management Simulation Trend Analysis Data Sheet Blank and try to understand what they tell you about your business? 38

39. 39 Bosscat e-Decision Sheet – Periods 2+

40. 40 EUE43E: ‘Trade & Commerce’ The End Robert Williams