Chapter 16 - Costs, Scale of Production, and Break-Even Analysis
Lesson Objective: To understand and to be able to differentiate among the many different types of costs
Costs, costs, costs... They come in many forms, sizes, and tastes:
Fixed costs;
Variable costs;
Total costs;
Average costs.
Let's first look in to fixed and variable costs:
Activity 16.1 (p. 216)
And then we have our total costs, which obviously is the sum of variable + fixed costs:
Activity 16.2 (p. 217)
And finally, average costs: the cost of producing a single unit of output.
Activity 16.3 (p. 217)
Why is cost data important?
We can use cost information to set prices and even to decide on whether is worth it continuing producing a certain product or not.
Example:
| Product A | Product B | Total |
Revenue | $20,000 | $50,000 | $70,000 |
Fixed Costs | $10,000 | $15,000 | $25,000 |
Variable Costs | $12,000 | $18,000 | $30,000 |
Total Costs | $22,000 | $33,000 | $55,000 |
Profit | ($2,000) | $17,000 | $15,000 |
Should this business stop producing product A?
Product A is a loss-making product (-$2,000)
However, even if they ditch product A the fixed costs of $10,000 will remain leading to an even bigger loss to the company:
| Product A | Product B | Total |
Revenue | 0 | $50,000 | $50,000 |
Fixed Costs | $10,000 | $15,000 | $25,000 |
Variable Costs | 0 | $18,000 | $18,000 |
Total Costs | $10,000 | $33,000 | $43,000 |
Profit | ($10,000) | $17,000 | $7,000 |
What if these business could get rid of Product A fixed costs? Would your answer remain the same?
| Product A | Product B | Total |
Revenue | $0 | $50,000 | $50,000 |
Fixed Costs | $0 | $15,000 | $15,000 |
Variable Costs | $0 | $18,000 | $18,000 |
Total Costs | $0 | $33,000 | $33,000 |
Profit | $0 | $17,000 | $17,000 |
To-Do List:
Activity 16.4 (p. 219)
Chapter 16 - Costs, Scale of Production, and Break-Even Analysis
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