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