FINANCING A BUSINESS

UNIT 1

COSTS, REVENUE AND PROFIT

PLANNING AND FINANCING A BUSINESS – Financial Planning

Calculating Costs, Revenues and Profits

What is a cost?

A sum of money paid for goods or services.

 

A Fixed Cost (Indirect Cost) is a cost which

will not change with production output. 

Examples: Rent, Rates, Insurance. 

Graphical representation

 Fixed Cost line is always horizontal

 Fixed Cost can increase or decrease but this is not determined by the level of output.

 Fixed Cost will remain constant for a period of time.

A Fixed Cost Graph 

 

Cost (£)

Increase in Fixed Costs

 

 

Fixed Cost

 

 

 

  Decrease in Fixed Costs

 

 

0 Units of Output

Variable Cost This is sometimes referred to as a Direct Cost. These costs can be directly related toproduction . Variable Cost per unit changes with production output. Examples: Raw Materials, and Wages . Graphical representation  The Unit Variable Costs might stay the same for Material, Labour and Expenses but the more units that are produced the greater will be the Total Variable Cost.

A Variable Cost Graph

Cost (£)

0 Units of Output

Variable Cost

Average Cost

This is calculated by finding the Total Cost (Total Fixed Cost plus Total Variable Cost) and

dividing it by the Total Number of Units Produced.  

Cost Data

Fixed Costs

Yearly Insurance for Premises £40,000

Yearly Rates for Premises £25,000

Yearly cost for Rent £20,000

Total Fixed Costs £85,000

 

Variable Costs

Direct Material Cost per unit £0.50

Direct Labour Costs per unit £0.75

Direct Expenses per unit £0.25

Variable Cost per unit £1.50

 

Assume that 10,000 units are Produced and Sold

Calculation of costs

Total Fixed costs £85,000

Total Variable cost (£1.50 per unit x 10,000 units) £15,000

 

Total Cost £100,000

 

 

 

Average Cost per unit

 

Formula: Average Cost per unit = Total Cost ÷ Total Units Produced

= £100,000 ÷ 10,000

= £10 per unit

 

Calculating Profit

Now assume that each unit is sold for £11.50 and that all units produced are sold.

 

 

Total Revenue (Sales) = units sold x selling price per unit

= £115,000

 

Total Cost = total fixed cost + total variable cost

= £85,000 + £15,000

= £100,000

 

Total Profit = total revenue – total cost

= £115,000 - £100,000

= £15,000

 

 

If the result is a minus then a loss has been made.

QUESTIONS Selling Price £11.50. VC £1.50 PU, FC

£85,000

1. Work out the total profit/loss the company would make if only 5000 units were sold.

2. Work out the total profit/loss if the selling price changed to £12.50 and units sold was still 5000.

3. Keeping the selling price at £12.50 work out the profit/loss if fixed costs rose to 90,000 and variable costs rose to £2 and 25,000 units were now sold.

4. Now work out the average cost if all 25,000 units were sold.

5. Increase the selling price to £15 and assume that 15,000 units were sold work out the total revenue.

6. Fixed costs are still 90,000 and Variable costs are £2 work out

(A) If the company made a profit on selling 15,000 units.

(B) The new average cost.

MORE QUESTIONS!!1. Cars ‘r’ Us sells toy cars for £8. The Output for January month is 290.

What is the total revenue?

2. It then works out that it’s fixed costs add up to £1500 a month and one car costs £2 to produce. Work out the total cost for Cars ‘r’ us if they produced 290 cars.

3. Now work out whether the company has made a profit for that month.

4. In February they change supplier and now make toy cars for £1.80 each. Though this month they sell only 250. Work out the profit/loss for the company.

5. In March they receive a big order for 1200 toy cars. Work out the average cost for Cars ‘r’ us.

6. In April they decide to increase their selling price by £1.50 however this has a detrimental affect on sales as they plummet to just 120 for that month. Work out the profit/loss for that month with FC £1500 and VC £1.80 per unit.

7. Finally in May a new insurance premium and rent price is negotiated reducing it to £1200. Work out the profit/loss as 160 cars are sold with SP £9.50.

COUNTDOWN KEY TERMS

Acts OverageClue:The lower it is the more profit

per unit

Costs and Revenue

COUNTDOWN KEY TERMS

Evenrue

Costs and Revenue

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codexfits

Costs and Revenue

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Saucer Inn

Costs and Revenue

Clue:A Fixed Cost

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A Warmer Tails

Costs and Revenue