Cost:
the amount of resources(in monetary terms) sacrificed to achieve a
particular object
Two types of cost for decisions :
Historic cost - a cost already incurred
Opportunity cost -the value of an opportunity forgone(sacrificed)
Historic costs are not directly involved in the decisions we make
•
Does the cost relate to the objective/improve business, relate to
the future, and vary with the decision, if not then it's irrelevant.
If it does matter with all these 3 points then it's a relevant cost
Minimum cost
9000 +1000 because of 50 times 20 and add this to 2,500
Which is 12,500
It’s a relevant cost as the cost vary with the decision, wouldn't need to be
replaced
Historic costs irrelevant, re sale value
800*12 = 9,600
As it's an opportunity cost, forgone and the alpha business is no longer
used
£300 for each
Irrelevant cost since it doesn't vary
Minimum price
Opportunity cost of the lord £9000
Cost of new engine £2500
Add together is = £11,500
Alternative route is better
Better to not spend 2,500
Behaviour of costs
Fixed cost remain constant/fixed when changes occur to the volume of
activity
Variable cost vary according to the volume of activity
Relevant costs are one of the areas of decision making, and in that it's for
one off type decision, e.g. contract type decisions and so relevant cost
decisions become very important, and so those which aren't run of the mill,
we look at the other two distinct type of costs, in relation to the volume of
activity, and distinguish those whether they are relevant/fixed and variable.
We tend to think of the business as a whole and we want to see the
survival of the cost. The fixed cost still needs to cover the whole business
and you as a whole, even though it doesn't vary.
• Production and output must provide a profit at the end of the day, that
must include the fixed costs
-Multi product businesses
Calculating the Break Even Point
Contribution per unit
Revenue - variable cost- fixed cost
Break even point is where the profit is 0
Is 0 profit
The Q*/ or B* is the break even point
Q has to do with quantity
So
Contribution per unit can summarise the sales venue and the variable cost
Just putting the q on the other side to get the quantity