Max’s Max’s Cartoon Cartoon CakesCakes

ObjectivesObjectives• To understand the different types of

costs that a business might have• To understand how a firm calculates its

sales revenue• To understand how profit is calculated• To understand the link between supply

and demand in the cake market

The aim of the game is …

… to make more profit than the other firms competing in the same market

Fixed CostsFixed CostsCosts that do not vary with

output eg rent, insurance

Fixed costs per month for Max:

£4,000

Variable CostsVariable Costs

Costs that do vary with output eg flour, eggs, sugar (raw materials)

Variable costs for one crate of cakes produced:

£1,000

FixedFixedCostsCosts

VariablVariablee

CostsCosts

Total CostsTotal Costs

+

=

Sales RevenueSales RevenueThe money received from

customers when they pay for goods.

Price x Number of goods sold:

£3 x 10 = £30

ProfitProfit

Sales - Total = ProfitRevenue Costs (or loss)

£500 - £200 = £300

Decisions each Decisions each monthmonth::

• How many crates of cakes shall we produce? (Output)

• How much shall we charge for each crate? (Price)

Price you should charge:Between £2,000 and £10,000 per

crate of modelsNumber of crates you should make:Between 2 and 10 crates

What I will buy:Cheapest price 8 cratesNext cheapest 6 cratesNext cheapest 4 cratesMost expensive 2 crates

Is it a good idea to charge a high price and

produce 8 crates of models?

True or False?

A fixed cost is a cost that does not vary with

output TrueTrue

True or False?The money received from customers when they pay for goods is called sales revenue.

TrueTrue

True or False?

An example of a variable cost is rent.

FalseFalse

True or False?

Sales revenue is a business cost.

FalseFalse

True or False?

An example of a variable cost in Max’s business is flour (a raw material).

TrueTrue

True or False?

If you charge a low price, a customer will always buy your product.

FalseFalse

True or False?

When the price of a good is increased, demand will usually decrease.

TrueTrue

True or False?

When the price of a good is increased, demand will always decrease.

FalseFalse

True or False?

If demand for a product decreases, a firm will probably reduce output.

TrueTrue