Slides calculate total cost and incremental costs

Calculate Total Cost And Incremental Costs Principles of Cost Analysis and Management © Dale R Geiger 2011 What if? • Relationship between cost and unit of output is neither fixed nor variable? • There are multiple elements that affect the cost of an output? • A different type of cost relationship is relevant to the decision at hand? © Dale R Geiger 2011 Terminal Learning Objective • Task: Calculate Total Cost And Incremental Costs Given Various Production Volumes • Condition: You are a cost advisor technician with access to all regulations/course handouts, and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) • Standard: With at least 80% accuracy: • • • • Describe multivariate (mixed) and incremental costs Express total multivariate cost in an equation Graph total multivariate cost over a relevant range Express incremental cost in an equation â Dale R Geiger 2011 Cost Definitions Mixed Costs - A combination of fixed and variable costs Total Cost = Variable Cost + Fixed Cost • Also known as multivariate costs © Dale R Geiger 2011 Multivariate Cost Expressions • Variable component: • Variable $Cost per Unit * # Units -Plus• Fixed component: • Sum of relevant costs that remain the same regardless of units of output © Dale R Geiger 2011 Multivariate Cost Example • Relevant cost of transporting a unit for onlocation training is $350,000 • Cost of training operations on-location runs $20,000 per day • What is the unit of output? • Days of training © Dale R Geiger 2011 Multivariate Cost Example • Relevant cost of transporting a unit for onlocation training is $350,000 • Cost of training operations on-location runs $20,000 per day • What is the unit of output? Days of training â Dale R Geiger 2011 Multivariate Cost Example • Relevant cost of transporting a unit for onlocation training is $350,000 • Cost of training operations on-location runs $20,000 per day • What is the cost expression for Fixed cost? • Fixed cost = $350,000 © Dale R Geiger 2011 Multivariate Cost Example • Relevant cost of transporting a unit for onlocation training is $350,000 • Cost of training operations on-location runs $20,000 per day • What is the cost expression for Fixed cost? • Fixed cost = $350,000 © Dale R Geiger 2011 Multivariate Cost Example • Relevant cost of transporting a unit for onlocation training is $350,000 • Cost of training operations on-location runs $20,000 per day • What is the cost expression for Variable Cost? • Variable cost = $20,000/day * # of days © Dale R Geiger 2011 10 Incremental Cost Example • Our airline provides a $.50 bag of peanuts and a $.75 can of soda to each passenger • Additional fuel cost per passenger is $8.75 • What is the Incremental cost of increasing from 125 to 126 passengers? • Incremental cost = Cost of 126 psgrs – Cost of 125 psgrs ($10 * 126 + $15,000) - ($10 * 125 + $15,000) = $10 © Dale R Geiger 2011 36 Incremental Cost Example • Our airline provides a $.50 bag of peanuts and a $.75 can of soda to each passenger • Additional fuel cost per passenger is $8.75 • What is the Incremental cost of increasing from 125 to 126 passengers? • Incremental cost = Cost of 126 psgrs – Cost of 125 psgrs ($10 * 126 + $15,000) - ($10 * 125 + $15,000) = $10 37 © Dale R Geiger 2011 Graph Airline Flight Cost $K 16.50 16.45 16.40 16.35 Incremental cost = $16,260 – $16,250 = 10 Total Cost at 125 passengers = 125 * $10 per passenger + $15,000 = $16,250 16.30 16.25 16.20 16.15 Total Cost at 126 passengers = 126 * $10 per passenger + $15,000 = $16,260 16.10 16.05 16.00 X Axis = Number of passengers As number of passengers increases, Total Cost increases © Dale R Geiger 2011 38 Incremental Cost Example • Our airline provides a $.50 bag of peanuts and a $.75 can of soda to each passenger • Additional fuel cost per passenger is $8.75 • What is the Incremental cost of increasing from 150 to 151 passengers? • Incremental cost = Cost of 151 psgrs – Cost of 150 psgrs ($10 * 151 + $30,000) - ($10 * 150 + $15,000) = $15,010 © Dale R Geiger 2011 39 Incremental Cost Example • Our airline provides a $.50 bag of peanuts and a $.75 can of soda to each passenger • Additional fuel cost per passenger is $8.75 • What is the Incremental cost of increasing from 150 to 151 passengers? • Incremental cost = Cost of 151 psgrs – Cost of 150 psgrs ($10 * 151 + $30,000) - ($10 * 150 + $15,000) = $15,010 © Dale R Geiger 2011 40 Graph Airline Flight Cost $K 33.00 Incremental cost = $16,500 – $31,510 = $15,010 31.00 29.00 Total Cost at 151 psgrs = 151 * $10 per psgr + $30,000 Or $31,510 27.00 25.00 23.00 21.00 19.00 Total Cost at 150 psgrs = 150 * $10 per psgr+ $15,000 Or $16,500 17.00 15.00 X Axis = Number of passengers As number of passengers increases, Total Cost increases © Dale R Geiger 2011 41 Check on Learning • What is the generic cost expression for incremental cost? • If the relevant range for fixed cost is not exceeded, incremental cost is equal to © Dale R Geiger 2011 42 Other Multivariate Cost Expressions • Some cost expressions consist of multiple components • Example: Cell phone plan Base plan $35 for 500 minutes Additional minutes $.25 per minute Data plan $10 for 200 MB Additional MB of data $.50 per MB © Dale R Geiger 2011 43 Cell Phone Plan Example Base plan $35 for 500 minutes Additional minutes $.25 per minute Data plan $10 for 200 MB Additional MB of data $.50 per MB • What is the cost expression? • Base plan $35 + $.25/min * additional minutes + data plan $10 + $.50/MB * additional MB © Dale R Geiger 2011 44 Cell Phone Plan Example Base plan $35 for 500 minutes Additional minutes $.25 per minute Data plan $10 for 200 MB Additional MB of data $.50 per MB • What is the cost expression? Base plan $35 + ($.25 per * add’l mins) + data plan $10 + ($.50 per MB * add’l MB) © Dale R Geiger 2011 45 Cell Phone Plan Example Base plan $35 for 500 minutes Additional minutes $.25 per minute Data plan $10 for 200 MB Additional MB of data $.50 per MB • What is the cost if 400 minutes and 250 MB are used? $35 + ($.25/min * additional minutes) + $10 + ($.50/MB * 50 additional MB) © Dale R Geiger 2011 46 Cell Phone Plan Example Base plan $35 for 500 minutes Additional minutes $.25 per minute Data plan $10 for 200 MB Additional MB of data $.50 per MB • What is the cost if 400 minutes and 250 MB are used? $35 + ($.25 per * additional minutes) + $10 + ($.50 per MB * 50 additional MB) = $70 © Dale R Geiger 2011 47 Graph of Cell Phone Cost $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 25 $10 $25 $35 50 M / in 00 m B $10 $10 $35 $35 00 M / 0 B 00 M / in 00 m © Dale R Geiger 2011 Add'l MB Data Plan Add'l minutes Base Plan B 48 Check on Learning • You are planning a one-week vacation for you and your significant other How would you define the cost expression for the trip? © Dale R Geiger 2011 49 Practical Exercises © Dale R Geiger 2011 50 ... Definitions • Mixed Costs - A combination of fixed and variable costs Total Cost = Variable Cost + Fixed Cost • Also known as multivariate costs © Dale R Geiger 2011 Multivariate Cost Expressions... the cost expression for Total Cost of on-location training? • Total Cost = Variable cost + Fixed Cost • Total Cost = $20,000 per day * #days + $350,000 © Dale R Geiger 2011 13 Graph of Mixed Cost. .. the decision at hand? © Dale R Geiger 2011 Terminal Learning Objective • Task: Calculate Total Cost And Incremental Costs Given Various Production Volumes • Condition: You are a cost advisor technician