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Business Development Services1
What are your costs?
Session 10
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Discuss the difference between price and cost Define fixed and variable costs Calculate fixed and variable costs for a sample
business Calculate break-even point Look at price from a financial or cost perspective Calculate fixed and variable costs for your business
Session objectives
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Cost: a business expense, or the money that goes out of your business to buy something for your business (e.g. raw materials, labour, rent, office supplies, etc.) Costs can be fixed or variable.
Price: an amount of money for which something is bought or sold (e.g. the selling price of your product, or something you buy for your business).
What’s the difference between price & cost?
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Variable costs are costs that are directly related to producing your product/service.
As sales go up, so do variable costs. As sales go down, so do variable costs.
Variable costs
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Variable costs
1 unit 2 units 3 units 4 units0
1
2
3
4
5
Variable costs
Unit sales
Cost
$
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Supplies or raw material (items or ingredients needed to produce your product/service)
Labour (to make the product or deliver the service)
Transportation (e.g. using a vehicle in a service business)
Packaging/shipping Fees that a business pays when customers use
debit or credit cards
Examples of variable costs
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After you pay your variable costs, what’s left over?
Contribution margin = the amount left over after paying variable costs…that can be used to pay the rest of your costs (fixed costs)
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Contribution margin is positive. E.g. $2.00 Contribution margin is zero. E.g. $0.00 Contribution margin is negative. E.g. ($2.00)
Good news or bad news?
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Price (per unit) - Variable costs (per unit) = Contribution margin (per unit)
Contribution margin
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Fixed costs are expenses that stay the same no matter how much or how little you sell
As sales increase, fixed costs stay the same. As sales decrease, fixed costs stay the same.
Fixed costs
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Fixed costs
1 unit 2 units 3 units 4 units0
1
2
3
4
5
Fixed costs
Unit sales
Cost
$
© 2013 SEED Winnipeg, Inc. All rights reserved 15
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Labour can be both a variable cost or a fixed cost
It depends on the kind of employment relationship.
What about labour?
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The break-even point is the minimum sales a business must make to cover fixed and variable costs, without losing or making money.
Any income above the break-even point is profit.
Anything below the break-even point is a loss.
Break-even point
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A successful business must have sales that are higher than the break-even point, so the business can:
Provide investors with a return on investments Keep money in the business to help it grow (e.g.
more advertising, new website, better equipment, etc.)
Save for years when there may be low sales
Break-even point
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You will calculate your break-even point in units.
This is the number of units you’ll need to sell to break even. You’ll need to know: Fixed costs Contribution margin
(selling price per unit – variable cost per unit)
Information you need to calculate break-even point