What’s the difference between price & cost? Igor Roitburg
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Session objectives ▪ Discuss the difference between price and cost ▪ Define fixed and variable costs ▪ Calculate fixed and variable costs for a sample 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 goes
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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).
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 5
Cost $
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Variable costs
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0 1 unit
2 units
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4 units
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Examples of variable costs ▪ Supplies or raw material (items or ingredients ▪ ▪ ▪ ▪
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 5
Cost $
4 3 Fixed costs
2 1 0 1 unit
2 units
3 units
4 units
Unit sales 11
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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
▪ ▪
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. Business Development Ser vices
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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. ▪
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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Thank You
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