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Section 10.1 The Cost of

Doing Business

Section 10.2 The Economics

of One Unit of Sale

Business Decisions & the Economics of One Unit

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OBJECTIVES

Define and provide examples of fixed expenses

Explain how variable expenses are calculated

Define economies of scale

The Cost of Doing Business

2 Section 10.1: The Cost of Doing Business

Fixed Expenses

A fixed cost is a recurring expense that isn’t affected by the number of items a business produces.

An easy way to remember eight of the most common fixed

expenses is to remember the phrase: I SAID U +Other

FXs

3 Section 10.1: The Cost of Doing Business

Insurance

Salaries

Advertising

Interest

Depreciation

Utilities (Gas, Electric, Telephone)

Rent

Other Fixed Expenses

Depreciation

Depreciation is an accounting method of spreading the total cost of the equipment a business buys over the number of years it will be used.

To caclulate the annual depreciation expense, you can

use the formula shown in the following example.

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Disposal Total Years Depreciation Value Depreciation Used Expense

$25,000 $4,000 $21,000 5 years $4,200

Section 10.1: The Cost of Doing Business

= ÷ – =

– = ÷ = Cost

Variable Expenses

A variable expense is an expense that changes based on the amount of product or service a business sells.

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.

5 Section 10.1: The Cost of Doing Business

Economies of Scale The cost reduction made possible by spreading costs over a larger volume is called an economy of scale.

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.

6 Section 10.1: The Cost of Doing Business

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OBJECTIVES

Define a unit of sale

Explain how to calculate the economics of one unit of

sale

The Economics of One Unit of Sale

7 Section 10.2: The Economics of One Unit of Sale

What Is a Unit of Sale?

The unit of sale is the basic building block of your

business.

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A unit of sale is what a customer actually buys from you. It’s also the amount of product (or service) you use to figure your operations and profit.

Section 10.2: The Economics of One Unit of Sale

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.

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Selling Price – Expenses = Profit (or Loss)

Selling Price – Variable Expenses = Contribution Margin

Section 10.2: The Economics of One Unit of Sale

EOU for a Manufacturing Business

10 Section 10.2: The Economics of One Unit of Sale

EOU for a Wholesale Business

11 Section 10.2: The Economics of One Unit of Sale

EOU for a Retail Business

12 Section 10.2: The Economics of One Unit of Sale

EOU for a Business Selling More Than One Product

13 Section 10.2: The Economics of One Unit of Sale

EOU for a Service Business

14 Section 10.2: The Economics of One Unit of Sale