to understand the different types of costs that exist and how you use them in calculations
TRANSCRIPT
Production costs and revenue
To understand the different types of costs that exist and how you use them in calculations.
Learning objective
The costs that stay the same no matter what your output is.
Examples include things such as rent, insurance, advertising and interest payments.
You have to pay these even if your factory is closed and making nothing.
Sometimes called overheads.
Fixed costs
These go up and down depending on how many of your product you are making.
There is a direct link to output. Examples include raw materials, packaging,
fuel and labour. If a business makes nothing, the variable
costs will be zero.
Variable costs
This is your fixed costs and your variable costs added together.
TOTAL COSTS = FIXED COSTS+VARIABLE COSTS
Total costs
Cost (£)
Trainers wages 400 per course
Other variable costs 100 per course
Premises rent 10,000 pa
Lorry hire costs 20,000 pa
Other fixed costs 10,000 pa
Example
The business trained 200 staff.
Fixed costs = 40,000 (10,000+20,000+10,000)
Variable costs = 100,000 (500 x 200)
Total costs = FC + VC = 40,000 + 100,000 = £140,000
BatCraft make cricket bats. They employ 6 workers to make the bats.
BatCraft produce 4800 bats, what is the total cost of production?
Working example
$
Rent 50,000 pa
Business rates 5,000 pa
Other fixed costs 25,000 pa
Wood 30 per bat
Other raw materials 10 per bat
Labour 50 per bat
Other variable costs 10 per bat
Calculated by taking the total cost and dividing by how many products are made.
Average cost = Total Cost
Quantity produced
Eg, £140,000 = £700 per course 200
Average cost
This is all of the money coming in from sales.
Total revenue = Price x Quantity
Eg, 900 courses at a cost of £200 each900 x 200 = £180,000
Total Revenue
This is the money that is left after paying all of the costs.
Profit = Total revenue – Total costs
Eg, £180,000 - 140,000 = £40,000
Total profit
Glenn bought a family cruiser in 2007 with a loan to offer daily fishing trips.
He charges $500 per day for the trip that takes up to 6 people.
Working example
Costs January $ February $
Tackle hire 560 440
Insurance 50 50
Interest payment 3,000 3,000
Picnic hampers 2,800 2,200
Fuel 1,400 1,100
Advertising 100 100
Other fixed costs 300 300
Number of trips 28 22
Fishing costs
Calculate Glenn’s total costs in January and February
Calculate the revenue make in January and February
Calculate the profit in January and February Calculate the average cost of a trip in
January and February
Your working out
What does 'total cost' mean? The total income earned by a firm The total expenses of a firm The total amount of profit earned by a
firm
Review question 1
What does the amount of revenue a business earns each month depend on? Selling price Quantity sold Both selling price and quantity sold
Review question 2
What is revenue sometimes called? Turnover Overheads Price
Review question 3
An increase in output does NOT mean an increase in: variable costs. overheads. direct costs.
Review question 4
A firm sells 10 units at £5 each. Its total costs are £30. How much profit is made? A £50 profit is made A £20 profit is made A £20 loss is made
Review question 5
How do you calculate profit? Subtracting total costs from total revenue Subtracting total revenue from total costs Multiplying the quantity sold by price
Review question 6
How do you calculate total revenue? Quantity sold x average price Quantity sold x average cost Quantity sold x average profit
Review question 7
When is a business making a loss? When revenues are higher than costs When revenues equal costs When revenues are less than costs
Review question 8
When is a business making a profit? When revenues are higher than costs When revenues equal costs When revenues are less than costs
Review question 9
If a company reduces a product's price, what does this mean for their revenue? There will be an increase in revenue There could be an increase or decrease in
revenue There will be an decrease in revenue
Review question 10