Chapter 13 Cost Revenue Profits

8/3/2019 Chapter 13 Cost Revenue Profits

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ECONOMICSECONOMICS Year 10Year 10

Costs, Revenues & ProfitsCosts, Revenues & Profits


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Making a ProfitMaking a Profit

DO EXERCISE 1 pp 222 The Bear NecessitiesDO EXERCISE 1 pp 222 The Bear Necessities

Fixed Costs Per week ($)

VariableCosts

Per bear ($)

Rent for factory 100 Materials 6.00Hire Machines 45.00 Foam 1.00

Heating & Lighting 5.00 Wages 1.00

Repayment of bank loan 50.00

TOTAL 200.00 8.00


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1.1. FixedFixed costcost that remains (more or less)that remains (more or less)

unchanged irrespective of theunchanged irrespective of the outputoutput level orlevel or

sales revenuesales revenue of a firm, such asof a firm, such as depreciationdepreciation,,insuranceinsurance,, interestinterest,, rentrent,, salariessalaries, and, and wageswages..

2.2. If Sue produced 100 bears in a week, FC isIf Sue produced 100 bears in a week, FC isstill $200.00 as remains unchangedstill $200.00 as remains unchanged

3.3. If Sue produced 1000 bears in a week, FC isIf Sue produced 1000 bears in a week, FC isstill $200.00 as remains unchangedstill $200.00 as remains unchanged
http://www.businessdictionary.com/definition/cost.htmlhttp://www.businessdictionary.com/definition/cost.htmlhttp://www.businessdictionary.com/definition/output.htmlhttp://www.businessdictionary.com/definition/output.htmlhttp://www.businessdictionary.com/definition/sales-revenue.htmlhttp://www.businessdictionary.com/definition/sales-revenue.htmlhttp://www.businessdictionary.com/definition/depreciation.htmlhttp://www.businessdictionary.com/definition/depreciation.htmlhttp://www.businessdictionary.com/definition/insurance.htmlhttp://www.businessdictionary.com/definition/insurance.htmlhttp://www.businessdictionary.com/definition/interest.htmlhttp://www.businessdictionary.com/definition/interest.htmlhttp://www.businessdictionary.com/definition/rent.htmlhttp://www.businessdictionary.com/definition/rent.htmlhttp://www.businessdictionary.com/definition/salary.htmlhttp://www.businessdictionary.com/definition/salary.htmlhttp://www.businessdictionary.com/definition/wages.htmlhttp://www.businessdictionary.com/definition/wages.htmlhttp://www.businessdictionary.com/definition/wages.htmlhttp://www.businessdictionary.com/definition/salary.htmlhttp://www.businessdictionary.com/definition/rent.htmlhttp://www.businessdictionary.com/definition/interest.htmlhttp://www.businessdictionary.com/definition/insurance.htmlhttp://www.businessdictionary.com/definition/depreciation.htmlhttp://www.businessdictionary.com/definition/sales-revenue.htmlhttp://www.businessdictionary.com/definition/output.htmlhttp://www.businessdictionary.com/definition/cost.html


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4.4. Variable Cost isVariable Cost is AA costcost ofoflaborlabor,, materialmaterial ororoverheadoverhead that changes according to thethat changes according to the changechange in thein thevolumevolume ofofproductionproductionunitsunits..

Combined withCombined with fixed costsfixed costs,,variablevariable costs make upcosts make upthethe total costtotal costof production.of production. (TC=TFC + TVC)(TC=TFC + TVC)

While the total variable cost changes with increasedWhile the total variable cost changes with increased

production, the totalproduction, the total fixedfixed costscosts staysstays the same.the same.

5.5. 1100 bears x 8 = $80000 bears x 8 = $800

6.6. 11000 bears x $8 = $8000000 bears x $8 = $8000

7.7. If 100 bears TC = 200 + 800 = $1000If 100 bears TC = 200 + 800 = $1000 If 1000 bears, the Total Cost = 200 + 8000 = $8200If 1000 bears, the Total Cost = 200 + 8000 = $8200
http://www.investorwords.com/1148/cost.htmlhttp://www.investorwords.com/1148/cost.htmlhttp://www.investorwords.com/2705/labor.htmlhttp://www.investorwords.com/2705/labor.htmlhttp://www.businessdictionary.com/definition/material.htmlhttp://www.businessdictionary.com/definition/material.htmlhttp://www.investorwords.com/3547/overhead.htmlhttp://www.investorwords.com/3547/overhead.htmlhttp://www.investorwords.com/7046/change.htmlhttp://www.investorwords.com/7046/change.htmlhttp://www.investorwords.com/5258/volume.htmlhttp://www.investorwords.com/5258/volume.htmlhttp://www.businessdictionary.com/definition/production.htmlhttp://www.businessdictionary.com/definition/production.htmlhttp://www.investorwords.com/5159/unit.htmlhttp://www.investorwords.com/5159/unit.htmlhttp://www.investorwords.com/1992/fixed_cost.htmlhttp://www.investorwords.com/1992/fixed_cost.htmlhttp://www.investorwords.com/1992/fixed_cost.htmlhttp://www.investorwords.com/5219/variable.htmlhttp://www.investorwords.com/5219/variable.htmlhttp://www.investorwords.com/5006/total_cost.htmlhttp://www.investorwords.com/5006/total_cost.htmlhttp://www.investorwords.com/5006/total_cost.htmlhttp://www.investorwords.com/1986/fixed.htmlhttp://www.investorwords.com/1986/fixed.htmlhttp://www.businessdictionary.com/definition/stay.htmlhttp://www.businessdictionary.com/definition/stay.htmlhttp://www.businessdictionary.com/definition/stay.htmlhttp://www.investorwords.com/1986/fixed.htmlhttp://www.investorwords.com/5006/total_cost.htmlhttp://www.investorwords.com/5219/variable.htmlhttp://www.investorwords.com/1992/fixed_cost.htmlhttp://www.investorwords.com/5159/unit.htmlhttp://www.businessdictionary.com/definition/production.htmlhttp://www.investorwords.com/5258/volume.htmlhttp://www.investorwords.com/7046/change.htmlhttp://www.investorwords.com/3547/overhead.htmlhttp://www.businessdictionary.com/definition/material.htmlhttp://www.investorwords.com/2705/labor.htmlhttp://www.investorwords.com/1148/cost.html


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8.8.

Bearsproduced

in a week

Fixed Cost Variable Cost Total cost Avg Cost

0 200 0 200

50 200 400 600 12

100 200 800 1000 10

200 200 1600 1800 9

300 200 2400 2600 8.67

400 200 3200 3400 8.5

500 200 4000 4200 8.4

600 200 4800 5000 8.33

700 200 5600 5800 8.29

800 200 6400 6600 8.25

900 200 7200 7400 8.22

1000 200 8000 8200 8.2


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88

0

2000

4000

6000

8000

10000

12000

050

100

200

300

400

500

600

700

800

900

1000

Number of bears

Costs/Rev

enues

Total cost

Total Revenue


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99

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

050

100

200

300

400

500

600

700

800

900

1000

No of Bears

Costs

Fixed Cost

Variable Cost

Total cost


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10.10. $10 per bear$10 per bear

11.11. $10$10

TOTAL REVENUE = Price per bear X NoTOTAL REVENUE = Price per bear X No

of bears soldof bears sold

Average Revenue (AR) = Total revenue/ NoAverage Revenue (AR) = Total revenue/ No

of bears soldof bears sold

12.12. 100 bears x $10 = Total revenues= $1000100 bears x $10 = Total revenues= $1000

13.13. 1000 bears = TR = 1000 x $10 = $100001000 bears = TR = 1000 x $10 = $10000


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1414

Bears produced in a week TotalRevenue

Total cost Profit/ Loss

0 200 -200

50 500 600 -100

100 1000 1000 0

200 2000 1800 200

300 3000 2600 400

400 4000 3400 600

500 5000 4200 800

600 6000 5000 1000

700 7000 5800 1200

800 8000 6600 1400900 9000 7400 1600

1000 10000 8200 1800

16. Break even point is TR = TC


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What is Cost?What is Cost? All payments made by a firm in the production of a good orAll payments made by a firm in the production of a good or

service are called the cost of production. These costs can beservice are called the cost of production. These costs can beclassified in different ways.classified in different ways.

Types of costsTypes of costsFixed Cost and Variable costFixed Cost and Variable cost Fixed costsFixed costs are expenses that do not change in proportion to theare expenses that do not change in proportion to the

activity of a business,activity of a business, within the relevant period or scale ofwithin the relevant period or scale ofproductionproduction..

For example, a retailer must pay rent and utility billsFor example, a retailer must pay rent and utility billsirrespective of sales.irrespective of sales.

Variable costsVariable costs by contrast change in relation to the activity of aby contrast change in relation to the activity of abusiness such as sales or production volume.business such as sales or production volume.


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In the example of the retailer, variable costs mayIn the example of the retailer, variable costs mayprimarily be composed of inventory (goods purchasedprimarily be composed of inventory (goods purchased

for sale), and thefor sale), and the cost of goodscost of goods is therefore almostis therefore almostentirely variable.entirely variable.

In manufacturing, direct material costs are an exampleIn manufacturing, direct material costs are an example

of a variable cost. An example of variable costs is theof a variable cost. An example of variable costs is theprices of the supplies needed to produce a product.prices of the supplies needed to produce a product.

And some electrical equipment (air conditioning orAnd some electrical equipment (air conditioning or

lighting) may be kept running even in periods of lowlighting) may be kept running even in periods of lowactivity. These expenses can be regarded as fixed.activity. These expenses can be regarded as fixed.

b d hi h ill l i i l dB b d hi h ill l i i l d


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But beyond this, the company will use electricity to run plant andBut beyond this, the company will use electricity to run plant andmachinery as required. The busier the company, the more the plant will bemachinery as required. The busier the company, the more the plant will berun, and so the more electricity gets used. This extra spending canrun, and so the more electricity gets used. This extra spending cantherefore be regarded as variable.therefore be regarded as variable.

Along with variable costs, fixed costs make up one of the two componentsAlong with variable costs, fixed costs make up one of the two componentsof total cost. In the most simple production function,of total cost. In the most simple production function,

TC = FC + VCTC = FC + VC

It is important to understand that fixed costs are "fixed" only within aIt is important to understand that fixed costs are "fixed" only within acertain range of activity or over a certain period of time.certain range of activity or over a certain period of time.

If enough time passes, all costs become variable.If enough time passes, all costs become variable.

Variable costs are expenses that change in proportion to the activity of aVariable costs are expenses that change in proportion to the activity of abusiness.business.

For example, a manufacturing firm pays for raw materials. When activityFor example, a manufacturing firm pays for raw materials. When activityis decreased, less raw material is used, and so the spending for rawis decreased, less raw material is used, and so the spending for rawmaterials falls. When activity is increased, more raw materials is used andmaterials falls. When activity is increased, more raw materials is used andspending therefore rises.spending therefore rises.


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Chapter 13 Cost Revenue Profits