Business Decisions & the Economics of One Unit
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Transcript of Business Decisions & the Economics of One Unit
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Section 10.1 The Cost ofDoing Business
Section 10.2 The Economicsof One Unit of Sale
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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
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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
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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
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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
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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
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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
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Are there any businesses that are completely free of expenses.
8Section 10.2: The Economics of One Unit of Sale
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The unit of sale is the basic building block of your business.
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If you are retailer selling shoes, What is your unit of sale?If are wholThe unit of sale is the basic building block of your business.
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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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12Section 10.2: The Economics of One Unit of Sale
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13Section 10.2: The Economics of One Unit of Sale
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14Section 10.2: The Economics of One Unit of Sale
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15Section 10.2: The Economics of One Unit of Sale
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16Section 10.2: The Economics of One Unit of Sale