Costs! (16.1)

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

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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:

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Activity 16.1 (p. 216)

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And then we have our total costs, which obviously is the sum of variable + fixed costs:

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Activity 16.2 (p. 217)

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And finally, average costs: the cost of producing a single unit of output.

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Activity 16.3 (p. 217)

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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.

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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

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To-Do List:

• Activity 16.4 (p. 219)

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Chapter 16 - Costs, Scale of Production, and Break-Even Analysis