business development services 1 what are your costs? session 10

Business Development Services1

What are your costs?

Session 10


Discuss the difference between price and cost Define fixed and variable costs Calculate fixed and variable costs for a sample

business Calculate break-even point Look at price from a financial or cost perspective Calculate fixed and variable costs for your business

Session objectives


Cost: a business expense, or the money that goes out of your business to buy something for your business (e.g. raw materials, labour, rent, office supplies, etc.) Costs can be fixed or variable.

Price: an amount of money for which something is bought or sold (e.g. the selling price of your product, or something you buy for your business).

What’s the difference between price & cost?


Variable costs are costs that are directly related to producing your product/service.

As sales go up, so do variable costs. As sales go down, so do variable costs.

Variable costs


Variable costs

1 unit 2 units 3 units 4 units0

1

2

3

4

5

Variable costs

Unit sales

Cost

$


Supplies or raw material (items or ingredients needed to produce your product/service)

Labour (to make the product or deliver the service)

Transportation (e.g. using a vehicle in a service business)

Packaging/shipping Fees that a business pays when customers use

debit or credit cards

Examples of variable costs


After you pay your variable costs, what’s left over?

Contribution margin = the amount left over after paying variable costs…that can be used to pay the rest of your costs (fixed costs)


Contribution margin is positive. E.g. $2.00 Contribution margin is zero. E.g. $0.00 Contribution margin is negative. E.g. ($2.00)

Good news or bad news?


Price (per unit) - Variable costs (per unit) = Contribution margin (per unit)

Contribution margin


Fixed costs are expenses that stay the same no matter how much or how little you sell

As sales increase, fixed costs stay the same. As sales decrease, fixed costs stay the same.

Fixed costs


Labour can be both a variable cost or a fixed cost

It depends on the kind of employment relationship.

What about labour?


The break-even point is the minimum sales a business must make to cover fixed and variable costs, without losing or making money.

Any income above the break-even point is profit.

Anything below the break-even point is a loss.

Break-even point


A successful business must have sales that are higher than the break-even point, so the business can:

Provide investors with a return on investments Keep money in the business to help it grow (e.g.

more advertising, new website, better equipment, etc.)

Save for years when there may be low sales

Break-even point


You will calculate your break-even point in units.

This is the number of units you’ll need to sell to break even. You’ll need to know: Fixed costs Contribution margin

(selling price per unit – variable cost per unit)

Information you need to calculate break-even point

business development services 1 what are your costs? session 10

Documents