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3.2 Cost and Revenues

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Laura Murphy

on 27 February 2017

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Transcript of 3.2 Cost and Revenues

3.2 Costs and Revenues
Ryanair, Europe's leading low-cost operator, announced that it would just break even in 2009 - no loss but no profit either - if the oil prices stay below $100 a barrel. The fall in the price of oil - a huge variable cost for airlines - means that Ryanair will not be forced to increase fares again.
Source: guardian.co.uk (adapted)

Think of five ways in which Ryanair could cut their costs or increase their revenues.

Read article - Ryanair top 10...
LQ: What is the difference between costs & revenues for a firm?

Learning Objectives:
Discuss Costs & Revenues.
Distinguish between various costs
Calculate business costs

Types of Costs
Cost control is vital to a business if they are to maintain and increase their profitability. Additionally, cost data is needed to assist in making important decisions.

The types of costs are:
fixed costs
variable costs
semi-variable costs
direct costs
indirect/overhead costs
Fixed, Variable and Semi- Variable Costs
Fixed costs
- costs that do not vary with the level of output. Examples are: rent, salaries, marketing costs (advertising) and insurance.

Variable costs
- costs that change in proportion of level of output. Examples: direct labour (pay per hour or per unit), raw materials and packaging costs.

Total Costs = Fixed costs + Variable costs

Semi-variable costs
- these include both a fixed and a variable element. Example: delivery van - fixed is insurance and license, variable is fuel and servicing.
Direct Costs
Indirect Costs
Direct costs
- is specifically related to a individual project or product.

one of the direct costs of a hamburger in McDonald's is the cost of the meat
one of the direct costs in a garage in servicing a car is the cost of the labour cost of the mechanic

The two most common direct costs in manufacturing are labour and materials. The most important direct cost in a service business such as retailing, is the cost of goods sold.
Indirect costs

- costs which cannot be identified with a unit of production - also known as

These are usually classified into four main groups:

Production overheads

- factory rent, power
Selling and distribution overheads
- warehouse, packing and distribution costs, salaries of sales staff
Administration overheads
- office rent, clerical and executive salaries
Finance overheads
- interest on loans

A. Classifying Costs
- the income received from the sale of a product.

Total Revenue
- total income from the sale of all units of the product.

Revenue = Quantity x Price

Profit = Total Revenue - Total Costs.

A business may receive income from sources other than its normal operating activities, known as
revenue streams.

advertising revenue, transaction fees, franchise costs & loyalties, sponsorship revenue, subscription fees, merchandise, dividends, donations, interest earnings.

B. Questions and
C. Cosmic Cases Case Study
The contribution of a product refers to how much it contributes to the fixed costs and profit of the business once variable costs have been covered.

It can be calculated either per unit of output or in terms of total contribution of all units produced.

contribution per unit = price - variable cost (per unit)

total contribution = (P - AVC) X Q
Contribution Analysis
Cost formulas
TC = FC + VC
AC = TC / Q or AFC + AVC
MC = change in TC / Change in Q

Revenue Formulas
Total Revenue = Price * Quantity

Average Revenue = TR / Q

Marginal Revenue = Change in TR / Change on Q
Profit = Total Contribution - TFC + Overheads
Calculate the TC if:
FC for the year = £55,000
VC = £10 per unit
Output = 22,500 units

Calculate the FC if:
TC for output of 1,000 = £42,000
VC = £1.50 per unit

Case Study : British Aerospace

Explain the ATC graph. (4 Marks)
TC = FC + VC

55,000 + 10 * 22,500 =
55,000 + 225,000 = 280,000
TC = FC + VC

42,000 = FC + 1.50 * 1000

42,000 = FC + 1500

FC = 40,500
Business Costs Quizz

Revision presentation: Costs

Costs, Revenue and Profits Quizz

Case Study: Ice Cream Production

Strategies to increase profits???

Increasing profits:
Increase total contribution by increasing sales
Decrease VC
Decrease FC/overheads
the sale of a fixed asset no longer needed.
rent from factory or office space to another business.
dividends on shares held in another business.
interest on deposits held in a bank.
Subsidies, grants, donations, fund raising, sponsorship.
Benefits of contribution analysis:
Helps firms to set prices.
Manage product portfolio.
ensures that cost allocation is done in a fair manner
helps with make-or-buy decisions.
Special order decisions.
helps make sure firms pay attention to their cash flow position
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