CHAPTER
Business Decisions &
the Economics of
One Unit
Section 10.1 The Cost of
Doing Business
Section 10.2 The Economics
of One Unit of Sale
SECTION
The Cost of
Doing Business
OBJECTIVES



Define and provide examples of fixed expenses
Explain how variable expenses are calculated
Define economies of scale
Section 10.1: The Cost of Doing Business
2
Fixed Expenses
A fixed cost is a recurring expense that isn’t affected by the
number of items a business produces.
An easy way to remember eight of the most common fixed
expenses is to remember the phrase: I SAID U +Other
FXs
Insurance
Salaries
Advertising
Interest
Depreciation
Utilities (Gas, Electric, Telephone)
Rent
Other Fixed Expenses
Section 10.1: The Cost of Doing Business
3
Depreciation
Depreciation is an accounting method of spreading the total
cost of the equipment a business buys over the number of years
it will be used.
To caclulate the annual depreciation expense, you can
use the formula shown in the following example.
Cost
–
$25,000 –
Disposal
Value
=
$4,000 =
Total
Years
÷
Depreciation
Used
$21,000
÷
5 years
=
=
Section 10.1: The Cost of Doing Business
Depreciation
Expense
$4,200
4
Variable Expenses
A variable expense is an expense that changes based on the
amount of product or service a business sells.
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.
Section 10.1: The Cost of Doing Business
5
Economies of Scale
The cost reduction made possible by spreading costs over a
larger volume is called an economy of scale.
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.
Section 10.1: The Cost of Doing Business
6
SECTION
The Economics
of One Unit of Sale
OBJECTIVES


Define a unit of sale
Explain how to calculate the economics of one unit of
sale
Section 10.2: The Economics of One Unit of Sale
7
What Is a Unit of Sale?
A unit of sale is what a customer actually buys from you. It’s
also the amount of product (or service) you use to figure your
operations and profit.
The unit of sale is the basic building block of your
business.
Section 10.2: The Economics of One Unit of Sale
8
The Economics of
One Unit of Sale
Selling Price – Expenses = Profit (or Loss)
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.
Selling Price – Variable Expenses = Contribution Margin
Section 10.2: The Economics of One Unit of Sale
9
EOU for a
Manufacturing Business
Section 10.2: The Economics of One Unit of Sale
10
EOU for a Wholesale Business
Section 10.2: The Economics of One Unit of Sale
11
EOU for a Retail Business
Section 10.2: The Economics of One Unit of Sale
12
EOU for a Business Selling
More Than One Product
Section 10.2: The Economics of One Unit of Sale
13
EOU for a Service Business
Section 10.2: The Economics of One Unit of Sale
14