Slides calculate total cost and per unit cost

Calculate Total Cost And Per-Unit Cost Principles of Cost Analysis and Management © Dale R Geiger 2011 How does total cost change as level of activity changes? © Dale R Geiger 2011 Terminal Learning Objective • • Task: Calculate Total Cost And Per-Unit Cost For A Given Production Volume • Standard: With at least 80% accuracy: Condition: You are a cost advisor technician with access to all regulations/course handouts, and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) variables and actors • • • • • Differentiate between fixed and variable costs Express total and per-unit variable cost in an equation Graph total and per-unit variable cost Express total and per-unit fixed costs in an equation Graph total and per-unit fixed costs © Dale R Geiger 2011 Why Study Cost Relationships? • • Understanding what drives cost helps to understand how to reduce cost Recognizing cost relationships helps to define what views of cost are useful © Dale R Geiger 2011 What is Cost Relationship? • • Describes the change in cost that occurs with a change in a variable Examples: • • • As number of students in class increases, total cost of class increases As snowfall increases, cost of snow removal increases As number of miles driven increases, total cost of trip increases © Dale R Geiger 2011 What is Cost Expression? • • • • Communicates a cost relationship using verbal, numerical and mathematical symbols Use plain language rather than variables x, y, z, etc Use math symbols • • • • Add (+) Subtract (–) Multiply (*) Divide (/) Example: Cost of hotel stay = Cost per day * # of days © Dale R Geiger 2011 Which Cost Expression is Useful? • Sometimes it is useful to know Total Cost • • Relevant cost of all inputs required to achieve desired output Example: Cost of PCAM = instructor pay + course materials + classroom facilities + students’ pay • Sometimes it is useful to know Unit Cost • • Unit cost = Total cost / # units Example: Cost to train one student © Dale R Geiger 2011 Linear Cost Relationships • • The simplest cost relationships can be represented by a straight line Variable Costs - Costs that increase in direct proportion with the volume produced or consumed • • • Total variable cost = Upward sloping line Unit variable cost = Horizontal line Example: Cost of materials used increases in direct proportion to number of units produced © Dale R Geiger 2011 Variable Cost Expression • Total Variable Cost = Variable $Cost per Unit * # Units • Variable $Cost per Unit = Sum of all Variable inputs © Dale R Geiger 2011 Variable Cost Expression • Total Variable Cost = Variable $Cost per Unit * # Units • Variable $Cost per Unit = Sum of all Variable inputs © Dale R Geiger 2011 10 Graph of Unit Fixed Cost Unit Cost = Total Fixed Cost/# Units $25,000 At 10 units, Unit Fixed Cost = $124,000/10 units or $12,400 per $20,000 unit $15,000 $12,400 $10,000 $5,000 $0 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 X Axis = Number of units As # units increases, Unit Fixed cost decreases © Dale R Geiger 2011 37 Graph of Unit Fixed Cost Unit Cost = Total Fixed Cost/# Units $25,000 $20,000 $15,000 At 40 units, Unit Fixed Cost = $124,000/40 units or $3,100 per $10,000 unit $5,000 $3,100 $0 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 X Axis = Number of units As # units increases, Unit Fixed cost decreases © Dale R Geiger 2011 38 Graph of Unit Fixed Cost Unit Cost = Total Fixed Cost/# Units $25,000 $20,000 $15,000 At 75 units, Unit Fixed Cost = $124,000/75 units or $1,653 per $10,000 unit $5,000 $1,653 $0 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 X Axis = Number of units As # units increases, Unit Fixed cost decreases © Dale R Geiger 2011 39 Check on Learning • • How is Total fixed cost represented on the graph? How is Unit fixed cost represented on the graph? © Dale R Geiger 2011 40 Demonstration Problem • • • • • A vehicle repair shop incurs an average parts cost per repair of $220 Shop rent is $5,000 per month Staff salaries are $5,000 per month and technicians earn a commission on repairs that averages $200 per repair Which costs are fixed? Which are variable? What is total cost of 100 repairs? 200 repairs? What is unit cost for 100 repairs? 200 repairs? © Dale R Geiger 2011 41 Demonstration Problem • • A vehicle repair shop incurs an average parts cost per repair of $220 Shop rent is $5,000 per month Staff salaries are $5,000 per month and technicians earn a commission on repairs that averages $200 per repair Which costs are fixed? Shop Rent Staff Salaries Total Fixed $5,000 5,000 $10,000 © Dale R Geiger 2011 42 Demonstration Problem • • A vehicle repair shop incurs an average parts cost per repair of $220 Shop rent is $5,000 per month Staff salaries are $5,000 per month and technicians earn a commission on repairs that averages $200 per repair Which costs are variable? Parts per repair $220 Commission per repair Total 200 $420 © Dale R Geiger 2011 43 Demonstration Problem • • A vehicle repair shop incurs an average parts cost per repair of $220 Shop rent is $5,000 per month Staff salaries are $5,000 per month and technicians earn a commission on repairs that averages $200 per repair What is total cost of 100 repairs? 200 repairs? Total cost= $420 per repair * # repairs + $10,000 $420 per repair*100 repairs+$10,000 = $52,000 $420 per repair*200 repairs+$10,000 = $85,000 © Dale R Geiger 2011 44 Demonstration Problem • • A vehicle repair shop incurs an average parts cost per repair of $220 Shop rent is $5,000 per month Staff salaries are $5,000 per month and technicians earn a commission on repairs that averages $200 per repair What is total cost of 100 repairs? 200 repairs? Total cost= $420 per repair * # repairs + $10,000 $420 per repair*100 repairs+$10,000 = $52,000 $420 per repair*200 repairs+$10,000 = $85,000 © Dale R Geiger 2011 45 Demonstration Problem • • A vehicle repair shop incurs an average parts cost per repair of $220 Shop rent is $5,000 per month Staff salaries are $5,000 per month and technicians earn a commission on repairs that averages $200 per repair What is total cost of 100 repairs? 200 repairs? Total cost= $420 per repair * # repairs + $10,000 $420 per repair*100 repairs+$10,000 = $52,000 $420 per repair*200 repairs+$10,000 = $94,000 © Dale R Geiger 2011 46 Demonstration Problem • • A vehicle repair shop incurs an average parts cost per repair of $220 Shop rent is $5,000 per month Staff salaries are $5,000 per month and technicians earn a commission on repairs that averages $200 per repair What is unit cost for 100 repairs? 200 repairs? Unit cost = Total cost / # repairs Total @100 repairs $52,000 / 100 repairs = $520 Total @200 repairs $94,000 / 200 repairs = $470 © Dale R Geiger 2011 47 Demonstration Problem • • A vehicle repair shop incurs an average parts cost per repair of $220 Shop rent is $5,000 per month Staff salaries are $5,000 per month and technicians earn a commission on repairs that averages $200 per repair What is unit cost for 100 repairs? 200 repairs? Unit cost = Total cost / # repairs Total @100 repairs $52,000 / 100 repairs = $520 Total @200 repairs $94,000 / 200 repairs = $470 © Dale R Geiger 2011 48 Demonstration Problem • • A vehicle repair shop incurs an average parts cost per repair of $220 Shop rent is $5,000 per month Staff salaries are $5,000 per month and technicians earn a commission on repairs that averages $200 per repair What is unit cost for 100 repairs? 200 repairs? Unit cost = Total cost / # repairs Total @100 repairs $52,000 / 100 repairs = $520 Total @200 repairs $94,000 / 200 repairs = $470 © Dale R Geiger 2011 49 Check on Learning • • What happens to total variable cost as number of units produced increases? What happens to unit fixed cost as number of units produced increases? © Dale R Geiger 2011 50 Practical Exercises © Dale R Geiger 2011 51 ... fixed and variable costs Express total and per-unit variable cost in an equation Graph total and per-unit variable cost Express total and per-unit fixed costs in an equation Graph total and per-unit. .. does total cost change as level of activity changes? © Dale R Geiger 2011 Terminal Learning Objective • • Task: Calculate Total Cost And Per-Unit Cost For A Given Production Volume • Standard:... 25 Fixed Cost Expression • Total Fixed $Cost = Sum of all Fixed Inputs • Fixed $Cost per Unit = Total Fixed $Cost / # Units © Dale R Geiger 2011 26 Fixed Cost Expression • Total Fixed $Cost = Sum