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Unit 5.2: Costs and Revenues Examine types of costs and sources of revenue

IB Business Management. Unit 5.2: Costs and Revenues Examine types of costs and sources of revenue Explain the role of contribution. Cost: expenditure in producing a product. NOT what it costs the consumer Revenue: $ a business receives from the sale of products Profit: revenue - costs.

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Unit 5.2: Costs and Revenues Examine types of costs and sources of revenue

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  1. IB Business Management • Unit 5.2: Costs and Revenues • Examine types of costs and sources of revenue • Explain the role of contribution

  2. Cost: expenditure in producing a product. NOT what it costs the consumer • Revenue:$ a business receives from the sale of products • Profit: revenue - costs Cost, Revenue, Profit

  3. Fixed Costs:Don’t change over short term, must be paid regardless of quantity produced/sold (even if there are no sales/output) • Examples:Rent, Salaries, Insurance, Loan payment Advertising Types of Costs • FC CAN change overtime, but are independent of level of output

  4. Variable Costs: Change in direct proportion to the level of output or sales (if amount of output/sales doubles, variable costs also double) Examples:Raw materials, sales commission, wages, packaging costs Types of Costs

  5. Formula for finding TOTAL COST? • TC = TVC + TFC How to find Total Cost (TC)?

  6. Semi-Variable Costs: Contain elements of both fixed & variable costs, typically change when business exceeds certain level of sales/output Examples: Exceeding minutes on cell phone plan, overtime pay, machinery maintenance Types of Costs

  7. Classify the following costs for an airline as fixed, variable or semi-variable: • Onboard drinks • Advertising & promotions • Airport fees • Fuel • Pilots’ salaries Practice

  8. Direct Costs:Costs specifically related to a particular project or to the output of a single product (would not occur if this project/product didn’t exist). • Similar to variable cost • Examples: Costs involved if your shoe company begins making t-shirts: machinery, workers’ wages, materials, design & research Types of Costs

  9. Indirect Costs (overhead): Costs that can’t be related to the level of output for a single product because they apply to all or several areas of the business • Similar to fixed costs • Examples: Utilities, insurance, rent, management salaries, advertising, legal expenses Types of Costs

  10. Classify the following costs for an airline as director indirect: • Onboard drinks • Advertising & promotions • Airport fees • Fuel • Pilots’ salaries Practice

  11. Average Cost: cost per unit • Total cost/output • Q = 1,000 TC = $8,000 AC = ? • Comprised of: • Average fixed costs (AFC) = TFC/Q • Declines continuously as Q increases • Average variable costs (AVC) = TVC/Q Average Cost

  12. Proceeds coming into a business, usually from the sale of goods and/or services • Revenue from the sale of a firm’s products is called sales revenue • Formula: Price x Quantity Sold Revenue

  13. If a business charges $60 for each pair of its shoes and sells 100 pairs in a week, its total sales revenue is: • $6,000 = $60 x 100 Revenue Example

  14. Other sources of revenue besides the sale of goods/services: • Subventions: similar to subsidies • Grants: government assistance • Donations: financial gifts • Fundraising: used by non-profit firms • Sponsorship: below-the-line promotion • Interest: from investments • Dividends: payments from holding shares • Sale of assets: firms sell assets for cash Revenue

  15. The amount of money (per unit) that remains after all direct and variable costs have been subtracted from the sales revenue for that product • Formulas: • Contribution per unit = P - AVC • Avg. Variable Cost = Total Var. Cost • Quantity Contribution

  16. School kids sells CDs for $12 each • Direct & variable costs are $8 per CD • Contribution = $12 - $8 = $4 • This isn’t profit because fixed & indirect costs haven’t been paid yet • Each CD contributes $4toward the payment of fixed & overhead costs • Therefore: • Profit = Contribution – TFC Contribution Example

  17. Why do businesses care about contribution? • Contribution analysis helps business identify areas that are profitable and areas that need more attention Contribution Analysis

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