IB Business and Management OPERATIONS MANAGEMENT 5.2 Costs and Revenue

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IB Business and Management OPERATIONS MANAGEMENT 5.2 Costs and Revenues

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IB Business and Management .com IB Business and Management T he IB Diploma Business and Management course delivered IN STYLE , ONLINE . ©

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z © Costs & revenues 5.2

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z © Costs & Revenues The basics … Business Expenditure on producing goods & services Money a business receives from the sales of its products to customers Profit (+) or loss ( - ) is the difference between revenues and costs Non-operating income: The sale of fixed assets Dividends on shares in another company Interest on bank deposits

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z Types of costs Businesses that sell a range of products Businesses that sell a Single product - break even analysis Cost Definition Explanation Example Fixed Costs that have to be paid but are not dependent on the level of output. They can also be called overhead costs These costs are incurred if the firm produces zero output Rent and rates on the premises, insurance Variable Costs which are output dependent As production increases, so do variable costs Raw material costs, wages of production workers Semi-variable Costs which may have a fixed charge initially, but after a certain level of usage may rise dependent on production levels See definition Electricity and telephone charges. Some internet fees are semi-fixed dependent on the plan used

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z © Classify the following costs for an airline co. as fixed or variable Advertising & promotion Airport charges fuel Remuneration of admin staff Remuneration of flight attendants

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z © Costs formulae Tc = Tfc + tvc ac = afc + avc ac = tc ÷ q afc = tfc ÷ q avc = tvc ÷ q Tvc = avc x q Tfc = afc x q mc = TC n -tc1 n-1 question 5.2.2, p 630

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z © Revenue formulae Ar = tr ÷ q P = Tr ÷ q P = ar Tr = p x q mr = Tr n -tr1 n-1 Question: 5.2.3, p 632 Non-sales revenue Non-operating income Subsidies/subventions Schools & hospitals Government grants One-off payments Fund-raising, etc. Interest, dividends Sale of assets

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z © contribution The Defining feature of fixed costs is that they don’t increase as output increases Price - avc Total Profit: TR - Tc average Profit: aR - ac Average Profit: price - afc - avc Variable costs covered & some contribution to fixed costs being made

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z © Is the difference between sales revenue & TVC. The difference is then used to contribute to paying fixed costs Once all costs, FC & vc are covered then the firm is making a profit. Use the concept of contribution to explain why a hotel may drop prices in the off-season to attract customers even though it will make a loss over this period contribution

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z © Contribution analysis for multi-product firms Each product is likely to contribute something towards the payment of fixed costs HL $8.6K per month Over-heads

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z © Contribution analysis modak’s cafe HL $8.6K per month Over-heads Product Price ($) 5.50 5.75 6.55 3.20 2.55 1.80 AVC ($) 2.25 2.75 3.15 0.95 1.05 0.80 Unit contribution($) 3.25 3.00 3.40 2.25 1.50 1.00 Sales (units per month) $ 1,140 1,215 980 1,264 766 800 Contribution $ 4,680 3,645 3,332 2,844 1,149 800

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z © Contribution analysis - uses for businesses HL

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z © Cost & profit centres Are clearly identifiable autonomous parts of an organisation for which costs can be attributed HL Are clearly identifiable autonomous parts of an organisation for which both costs & revenues can be worked out