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- 1. The cost of production is an important factor in almost all business analysis and decision, etc..cost reffers to the expenses incurred in production
- 2. Cost analysis refers to the study of behavior of cost in relation to one or more production criteria like size of output, scale of operation, price of factors of production
- 3. Break-Even Analysis There are two basic types of costs a company incurs. • Variable Costs • Fixed Costs Variable costs are costs that change with changes in production levels or sales. Examples include: Costs of materials used in the production of the goods. Fixed costs remain roughly the same regardless of sales/output levels. Examples include: Rent, Insurance and Wages
- 4. Break-Even AnAlysis TOTAL COSTS ◦ Total Costs is simply Fixed Costs and Variable Costs added together. TC = FC + VC ◦ As Total Costs include some of the Variable Costs then Total Costs will also change with any changes in output/sales.
- 5. Unit TFC TVC TC 0 60 60-60=0 60 1 60 100-60=40 100 2 60 120-60=60 120 3 60 130-60=70 130 4 60 160-60=110 160 5 60 220-60=160 220 6 60 360-60=300 360
- 6. Y TC TVC COST C 0 TFC QUALITY OF OUTPUT X
- 7. The Break-even point occurs when Total Costs equals Revenue (Sales Income) Revenues (Sales Income) = Total Costs At this point the business is not making a Profit nor incurring a Loss – it is merely covering its Total Costs Let us have a look at a simple example. Bannerman Trading Company opens a flower shop.
- 8. Fixed Costs: • • Rent: £400 Helper (Wages): £200 Variable Costs: • Flowers: £0.50 per bunch Selling Price: • Flowers: £2 per bunch So we know that: Total Fixed Costs = £600 Variable Cost per Unit = £0.50 Selling Price per Unit = £2.00
- 9. Break-Even Analysis SP = £2.00 VC = £0.50 FC = £600 We must firstly calculate how much income from each bunch of flowers can go towards covering the Fixed Costs. This is called the Unit Contribution. Selling Price – Variable Costs = Unit Contribution £2.00 - £0.50 = £1.50 For every bunch of flowers sold £1.50 can go towards covering Fixed Costs
- 10. Break-Even Analysis Now to calculate how many units must be sold to cover Total Costs (FC + VC) SP = £2.00 VC = £0.50 Unit cont = £1.50 FC = £600 This is called the Break Even Point Break Even Point = Fixed Costs Unit Contribution £600 £1.50 = 400 Units Therefore 400 bunches of flowers must be sold to Break Even – at this the point the business is not making a Profit nor incurring a Loss – it is merely covering its Total Costs
- 11. R O

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