Session 10
What are your costs?
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Business Development Services
Session objectives
 Discuss the difference between price and cost
 Define fixed and variable costs
 Calculate fixed and variable costs for a sample
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business
Calculate break-even point
Look at price from a financial or cost perspective
Calculate fixed and variable costs for your business
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What’s the difference
between price & cost?
 Cost: a business expense, or the money that
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goes out of your business to buy something for
your business (e.g. raw materials, labour, rent,
office supplies, etc.) Costs can be fixed or
variable.
Price: an amount of money for which
something is bought or sold (e.g. the selling
price of your product, or something you buy
for your business).
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Variable costs
 Variable costs are costs that are directly
related to producing your
product/service.
 As sales go up, so do variable costs. As
sales go down, so do variable costs.
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Variable costs
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4
Cost $
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Variable costs
2
1
0
1 unit
2 units
3 units
4 units
Unit sales
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Examples of variable costs
 Supplies or raw material (items or ingredients
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needed to produce your product/service)
Labour (to make the product or deliver the
service)
Transportation (e.g. using a vehicle in a service
business)
Packaging/shipping
Fees that a business pays when customers use
debit or credit cards
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 After you pay your variable costs, what’s left
over?
 Contribution margin = the amount left over
after paying variable costs…that can be used
to pay the rest of your costs (fixed costs)
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Good news or bad news?
 Contribution margin is positive. E.g. $2.00
 Contribution margin is zero. E.g. $0.00
 Contribution margin is negative. E.g. ($2.00)
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Contribution margin
Price (per unit)
- Variable costs (per unit)
= Contribution margin (per unit)
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Fixed costs
 Fixed costs are expenses that stay the same
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no matter how much or how little you sell
As sales increase, fixed costs stay the same.
As sales decrease, fixed costs stay the same.
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Fixed costs
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Cost $
4
3
2
Fixed costs
1
0
1 unit
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2 units
3 units
Unit sales
4 units
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What about labour?
 Labour can be both a variable cost or a
fixed cost
 It depends on the kind of employment
relationship.
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Break-even point
 The break-even point is the minimum sales a
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business must make to cover fixed and
variable costs, without losing or making
money.
Any income above the break-even point is
profit.
Anything below the break-even point is a
loss.
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Break-even point
 A successful business must have sales
that are higher than the break-even
point, so the business can:
 Provide investors with a return on investments
 Keep money in the business to help it grow (e.g.
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more advertising, new website, better
equipment, etc.)
Save for years when there may be low sales
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Information you need to calculate
break-even point
 You will calculate your break-even point
in units.
 This is the number of units you’ll need to
sell to break even. You’ll need to know:
 Fixed costs
 Contribution margin
 (selling price per unit – variable cost per unit)
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