C2 and C3 Powerpoint

C2 and C3 Powerpoint - More Costs… ( The Avalanche...

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Unformatted text preview: More Costs… ( The Avalanche Journal ). “False alarms cost the Lubbock Police Department about $255,000 per year…” Do You Believe False Alarms Cost the City ¼ Million per year? Does the city need to charge $100 per false alarm to “cover its costs”? What does one more false alarm cost? Why is Cost information important? • Forming Expectations. • Making Decisions. • Affecting Evaluations. Krispy Kreme Doughnuts Last Year This Year Revenue 146,000 175,200 Total Cost 120,000 Profit 26,000 20% ↑ $31,200 ??? 20% ↑ Krispy Kreme will likely make more than $31,200. Why? Some of their costs won’t go up by 20%. Doughnuts Made Total Cost of Doughnuts Variable Costs : the total increases with output If costs are variable, the more doughnuts you make – the more costs you incur. Doughnuts Made Variable Cost Per Doughnut Variable Cost Per Unit The cost per doughnut is constant. For example, 20 cents each. Assumed Numbers at Krispy Kreme Last Year This Year Revenue 146,000 175,200 Total Cost 120,000 144,000 Profit 26,000 $31,200 If all of Krispy Kreme’s costs were variable costs, then when revenue increased by 20%, profit would also increase by 20%. Assumed Numbers at Krispy Kreme Last Year This Year Revenue 146,000 175,200 Total Cost 120,000 144,000 Profit 26,000 $31,200 If all costs are variable, you aren’t using any leverage . Number of Doughnuts Made RENT Expense Total Fixed Cost Example Krispy Kreme’s rent doesn’t change depending upon output. Number of Doughnuts Made RENT Expense per doughnut Fixed Cost Per Unit The fixed cost per doughnut decreases as more doughnuts are made…aka “economies of scale” Assumed Numbers at Krispy Kreme Last Year This Year Revenue 146,000 175,200 Total Cost 120,000 120,000 Profit 26,000 $55,200 If all of Krispy Kreme’s costs were fixed costs, increases in revenue would equal increases in profit. $29,200↑ $29,200↑ Assumed Numbers at Krispy Kreme Last Year This Year Revenue 146,000 175,200 Total Cost 120,000 120,000 Profit 26,000 $55,200 If all costs are fixed, you are highly leveraged . Competitive Position • The relative amount of fixed vs. variable costs affects risk and return. • Relatively high fixed cost = high risk, high return • Relatively low fixed cost = low risk, low return This risk vs. return tradeoff is captured in the concept of operating leverage . Relationship Between Cost Behavior and Revenue Variable Cost Structure Variable Cost Revenue P r o f i t $ Activity Relationship Between Cost Behavior and Revenue Fixed Cost Structure Fixed Cost Profit Loss Revenue $ Activity Typically, costs are neither completely fixed nor completely variable. Step-Variable Costs Activity Cost Total cost remains constant within a narrow range of activity. Step-Variable Costs Activity Cost Total cost increases to a new higher cost for the next higher range of activity. Fixed Monthly...
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This document was uploaded on 10/27/2011 for the course BUSINESS ALL at Texas Tech.

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C2 and C3 Powerpoint - More Costs… ( The Avalanche...

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