Business Calculations
Block 4
Chapter 12.5/12.6
Costs in relation to production
Costs in relation to the output level.
2 groups:
Costs in relation to production
Costs in relation to the output level.
2 groups:
Fixed costs
Variable costs
Costs in relation to production
Costs in relation to the output level.
2 groups: Characteristics
Fixed costs
Variable costs
Costs in relation to production
Costs in relation to the output level.
2 groups: Characteristics
Fixed costs Remain constant on changing output level
Variable costs Change depending on changing output level
Costs in relation to production
Costs in relation to the output level.
2 groups: Characteristics
Fixed costs Remain constant on changing output level
Variable costs Change depending on changing output level
Can fixed costs change?
Costs in relation to production
Costs in relation to the output level.
2 groups: Characteristics
Fixed costs Remain constant on changing output level
Variable costs Change depending on changing output level
Can fixed costs change? Yes. Fixed costs can change on other factor than output
level. E.g. if salaries are increasing or if you start renting an extra building.
Fixed costs
Source: The Basics of Financial Management, 5th edtion, page 270.
Variable costs
Source: The Basics of Financial Management, 5th edtion, page 267.
Costs
Variable cost (per unit)
Total variable costs
(Total) Fixed costs
Fixed cost per unit
Total costs
Example: Output level 100 products
Variable costs € 2.-
Total fixed costs € 50.-
Total costs ??????
Estimating Cost Functions
Marketing Strategies Cost leadership (Porter)
Operational
Excellence (Treacy & Wiersema)
Estimating Cost Functions
Marketing Strategies Cost leadership (Porter)
Operational
Excellence (Treacy & Wiersema)
Goal Producing at lower costs.
Estimating Cost Functions
Marketing Strategies Cost leadership (Porter)
Operational
Excellence (Treacy & Wiersema)
Goal Producing at lower costs.
Complete analysis of the cost structure is a complex operation. To determine the
cost structure of the overall company, we can map production volumes and
realized costs.
Estimating Cost Functions
Cost behaviour: Check if the variable costs have a lineair or
propoertional
progression.
Lineair Total cost = fixed costs + output level x variable cost
per unit
Progressive High-low method (E12.4)
Chapter 12.5 Break-even analysis
Break-even
Chapter 12.5 Break-even analysis
Break-even = The point were sales volume and revenue cover all costs. The
point where the company doesn’t make profit or loss.
Chapter 12.5 Break-even analysis
Break-even = The point were sales volume and revenue cover all costs. The
point where the company doesn’t make profit or loss.
Break-even quantity = fixed costs / (selling price – variable unit costs)
Break-even revenue = fixed costs / contribution margin in percentage
Example Surfboards
Selling price 625 euro
Fixed costs 4,500,000 euro
Variable costs 250 euro per surfboard
Output level is equal to sales volume
Targeted profit is 150,000 euro
Example Surfboards
Selling price 625 euro
Fixed costs 4,500,000 euro
Variable costs 250 euro per surfboard
Output level is equal to sales volume
Targeted profit is 150,000 euro
How much is the contribution margin in euro’s and percentage?
Example Surfboards
Selling price 625 euro
Fixed costs 4,500,000 euro
Variable costs 250 euro per surfboard
Output level is equal to sales volume
Targeted profit is 150,000 euro
How much is the break-even point in sales volume and revenu?
Example Surfboards
Selling price 625 euro
Fixed costs 4,500,000 euro
Variable costs 250 euro per surfboard
Output level is equal to sales volume
Targeted profit is 150,000 euro
How much sales revenu do we need to meet the targeted profit?
Chapter 12.6 Assumptions
Three principles must be met:
Linearity of costs and revenues
One type of product
Production = sales volume
