Section 3 – Production costs at Holden plc

Lesson objectives To be able to calculate, explain and interpret fixed, variable, average and total costs To be able to calculate break-even To be able to answer quiz questions based on the case study

Starter Design a bean bag - you have 5 mins to sketch a quick design. Be prepared to explain who would buy it and why.

Some key terms Fixed costs – these are costs that do not vary with the level of output or in this case the number of bean bags made, for example rent on a factory Variable costs – these are costs that do vary with level of output – in this case the fabric cost Sales revenue – this is the amount of money that is made from selling the goods (bean bags) before any costs are deducted Selling price – this is the price of the item to the buyer per unit – in this case per bean bag Profit – this is the amount of money that is left over after all costs are deducted from the sales revenue. This can be reinvested in the business – or in this case paid out to shareholders as dividends as they are a plc

Do you have your calculator ready?

One Hip-Hop bean bag which Holden plc sells to retailers for £18 Sales of Hip-Hop bean bags were 80,000 units in How much revenue did Holden plc make?

80,000 x £18 = £1,440,000 or £1.44 million This is not profit For profit we need to minus total costs from total revenue. How much profit did Holden plc make?

How much profit did Holden make? Costs are £15 per bean bag x 80,000 units sold = £1,200,000 Profit = TR – TC = £1,440,000 - £1,200,000 Profit = £240,000

Production costs ItemCost per unit Fixed or variable cost Cost x 80,000 units Filling£4.00VC£320,000 Fabric Cost Make-up cost* Expenses Total costs£ Total revenue£ price per unit Profit TR-TC£ profit per unit *Make-up is the term using for sewing a cushion cover

Production costs ItemCost per unit Fixed or variable cost Cost x 80,000 units Filling£4.00VC£320,000 Fabric Cost£4.00VC£320,000 Make-up cost*£3.00VC£240,000 Expenses£4.00FC£320,000 Total costs£15£1,200,000 Total revenue£18 price per unit£1,440,000 Profit TR-TC£3 profit per unit£240,000 *Make-up is the term using for sewing a cushion cover

Break -even Break-even is where costs of production equal sales revenue made Assuming that the expenses are a fixed cost: FC _________ SP- VC Where FC = Fixed costs SP = Selling price per unit VC = Variable cost per unit Break-even is where costs of production equal sales revenue made Assuming that the expenses are a fixed cost: FC _________ SP- VC Where FC = Fixed costs SP = Selling price per unit VC = Variable cost per unit

Break-even 320,000 _________ ,000 ________ 7 Break-even is 45, Rounded up 45,715 bean bags

Conclusions In teams come up with a conclusion about Holden plc and their break-even point What would you recommend that they do?

Average costs of production Average cost – the cost for each unit of production (hip-hop bean bag) that Holden plc sells Formula time: Average cost = TC / amount sold Average cost – the cost for each unit of production (hip-hop bean bag) that Holden plc sells Formula time: Average cost = TC / amount sold

Average Costs £1,200,000 ___________ 80,000 Average costs are £15 per unit

What would Holden plc do with an average cost calculation? This will help them to decide what price to charge This will help them to compare costs of different items and decide what to produce This will help them to compare the average costs of a bean bag made in the UK and one made in China, this will help them to decide if they should move production back to the UK To help Martin Holden the production Director to make business decisions

Quiz on section 3 1.What is the name of the bean bag that Holden plc produces? 2.How many bean bags did Holden plc sell between 2012 and 2013? 3.What is the make-up cost per bean bag? 4.How much profit did Holden plc make from the bean bags? 5.What is the average cost per bean bag?

Answers to section 3 - Quiz 1.Hip-Hop 2.80,000 3.£3.00 per bean bag 4.£240,000 5.£15