1. FIXED VS. VARIABLE COSTS

2. To know the types of costs businesses incur and how they deal with them. Why products are priced the way they are from the business’s perspective (as opposed to the consumer’s). WHY LEARN THIS?

3. Variable Costs: Costs that VARY with production or activity. Examples: hourly wages, electricity, hot dog and hamburger buns. Fixed Costs: Costs that are incurred no matter how much is produced. Examples: rent, salaries (Switch to Excel Spreadsheet) DEFINITIONS

4. y = m(x) + b (Total Cost) (variable cost * (# of units (Fixed Cost) per unit) produced) [rent, salary] Variable Cost EQUATION m(x) = variable cost b = fixed cost y = total cost

5.  Cost of a Samsung S5: $260  Cost of factory rent (fixed cost): $10,000 Y = $260x+ $10,000  Total Cost at: 0 phones = $10,000 (260(0) = 0+10,000 = 10,000) 100 phones = $36,000 (26,000 + 10,000) 200 phones = $ ? 300 phones = $ ? GUIDED PRACTICE

6. Phones MadeTotal Cost 0$10,000 100$36,000 200$62,000 300$88,000 GRAPH Total Cost Phones Made

7. Differentiating Fixed and Variable costs allow managers to know which costs are DIRECTLY related to production and/or distribution and which are not. Most fixed costs are called “overhead” in the business world. Allows managers to make better business decisions because… Managers have direct control over certain costs but not over others. IMPORTANCE

8. Knowing fixed costs and variable costs allows a company to calculate its break-even point (the point where a company covers all off its costs to incur zero profits). Sales – Total Variable Costs = Contribution Margin More to come on break-even and Contribution Margin in the Business Unit. IMPORTANCE