Section 10.1 The Cost ofDoing Business

Section 10.2 The Economicsof One Unit of Sale

OBJECTIVES

Define and provide examples of fixed expenses Explain how variable expenses are calculated Define economies of scale

2Section 10.1: The Cost of Doing Business

An easy way to remember eight of the most common fixed expenses is to remember the phrase: I SAID U +Other FXs

3Section 10.1: The Cost of Doing Business

Insurance

Salaries

Advertising

Interest

Depreciation

Utilities (Gas, Electric, Telephone)

Rent

Other Fixed Expenses

To caclulate the annual depreciation expense, you can use the formula shown in the following example.

4Section 10.1: The Cost of Doing Business

=÷– =

– = ÷ =Cost

The two types of variable expenses are:

Cost of Goods Sold (COGS). For manufacturing and merchandising (retailing and wholesaling) businesses, the variable expense that is associated with each unit of sale is called the cost of goods sold.

Other Variable Expenses. These can include such expenses as commissions for salespeople, shipping and handling charges, or packaging.

5Section 10.1: The Cost of Doing Business

The most common ways to gain an economy of scale are:

Spreading fixed costs over as much output as possible. Typically, as your fixed costs per unit decrease, your profit increases.

Getting better deals from suppliers. You can get discounts from suppliers if you buy in quantity (volume discounts). Typically, as your cost of goods sold per unit decreases, your profit increases.

6Section 10.1: The Cost of Doing Business

OBJECTIVES

Define a unit of sale Explain how to calculate the economics of one

unit of sale

7Section 10.2: The Economics of One Unit of Sale

The unit of sale is the basic building block of your business.

8Section 10.2: The Economics of One Unit of Sale

To calculate the economics of one unit of sale, subtract the variable expenses for a unit from the unit’s selling price. The result is the contribution margin. This is the amount per unit that a product contributes toward the company’s profitability before the fixed expenses are subtracted.

9Section 10.2: The Economics of One Unit of Sale

10Section 10.2: The Economics of One Unit of Sale

11Section 10.2: The Economics of One Unit of Sale

12Section 10.2: The Economics of One Unit of Sale

13Section 10.2: The Economics of One Unit of Sale

14Section 10.2: The Economics of One Unit of Sale