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5.2 Costs and Revenues

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Mario Alvarado M.

on 8 May 2014

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Transcript of 5.2 Costs and Revenues

Unit 5.2
Costs and Revenues
Cost
refers to the expenditure in producing something.
Revenue
is the money a business receives from the sale of products to customers.
TYPES OF COSTS
Exercises
REVENUE
Revenue
refers to the proceeds coming into a business, usually from the sale of goods and/or services. Revenue that comes from the sales of a firm's products are called
sales revenue
or
sales turnover
.
Introduction
A positive difference between revenues and costs will the leave the business with
profit
.
Fixed Costs:

costs that the business has to pay regardless of how much it produces or sells. Ex.: Rent, advertising, market research, management salaries, stationery, security, professional accountancy fees.
Variable Costs:
The costs of production that change in direct proportion to the level of output or sales. Ex.: raw material, commissions, packaging.
Semi-variable Costs:
Those that contain an element of both fixed and variable costs. Only tend to change when production or sales exceed a certain level of output. Ex.: mobile telephone bills, labor costs*, machinery and vehicles*
Direct costs
:
They are similar to variable costs in that they change with the level of output. But, a DC is specifically related to a particular project or the output of a single product. Ex.: consultancy fees, solicitor's fees, telephone bills, postage, photocopying, mortgage fees and bank charges.
Indirect costs (overheads)
: cannot be clearly related to the level of output of any single product, i.e. they are not directly linked with the level of production or sale of a product. Ex.: fuel, power, rent, advertising, legal expenses, insurance, security, stationery, shipping, utility bills, etc.
Average costs
The average cost of production is calculated by dividing total costs by the level of output. Ex.: If total costs of producing 1000 t-shirts amounts to $8000, the cost of each t-shirt averages out at $8.
Average costs (AC) fall and rise due to economies and diseconomies of scale respectively. The level of output where AC are at their lowest is known as the

optimal level of output
.
Cola Soft Drinks Ltd. has fixed overheads of $500 and sells 200 units per month. Each item sells for $35 and has direct costs of $15. Calculate the total costs per month for the business.
Study the table below and determine the fixed costs of production for the firm:
Jersey Clothes Ltd. has fixed overheads of $500 and sells 200 units per month. Each item sells for $35 and has direct costs of $15. Calculate the change in the average cost of production at 100 units and 200 units of output and identify why the unit cost has changed.
Jacobson Candies has monthly fixed costs of $3000 and unit variable costs of $2. Its current level of demand is 3000 units each month. The average unit price is $6. Calculate the firm's current average costs each month.
a. $1200 b. $1250
c. $1285 d. $3500
a. Decreased from $20 to $17.50 due to economies of scale
b. Increased from $17.50 to $20 due to diseconomies of scale
c. Decreased from $17.50 to $15.50 due to economies of scale
d. Increased from $15.50 to $17.50 due to diseconomies of scale
a. $4 b.$3
c. $3.50 d. $2.50
The following data refers to the cost and revenues of Good Guys Toys Ltd. when operating at 2000 units of output per month. Calculate the total cost of producing 2000 units.
a. $12500 b. $11500
c. $14500 d. $15500
a. $750 b. $1500
c. $1595 d. $2345
Price * Quantity Sold = Revenue
Other sources of non-sales revenues for a business include:
Subventions
Grants
Donations
Fund-raising
Sponsorship
Interest
Dividends
Sale of assets
Exercises
Festa Soft Drinks Ltd. has fixed overheads of $500 and sells 200 units per month. Each item sells for $35 and has direct costs of $15. Calculate the firm's profit for the month.
The following data refers to the cost and revenues of Golden Locks Ltd. when operating at 2000 units of output per month. Calculate the profit made if the firm manages to sell all of its output.
a.$1200 b.$1250
c.$1285 d.$3500
a.$12500 b.$11500
c.$14500 d.$15500
Profit (or loss)
=
TR-TC
APPORTIONING OVERHEADS TO COST AND PROFIT CENTERS
Contribution per Unit
=
P - AVC
Profit
=
Total Contribution - TFC
Full transcript