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Business Decisions & the Economics of One Unit. 10. Section 10.1 The Cost of Doing Business Section 10.2 The Economics of One Unit of Sale. The Cost of Doing Business. 10.1. Define and provide examples of fixed expenses Explain how variable expenses are calculated

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Business Decisions & the Economics of One Unit

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### Business Decisions & the Economics ofOne Unit

10

Section 10.1 The Cost of

Section 10.2 The Economics

of One Unit of Sale

10.1

• 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

### 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

Interest

Depreciation

Utilities (Gas, Electric, Telephone)

Rent

Other Fixed Expenses

Section 10.1: The Cost of Doing Business

### 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.

DisposalTotalYears Depreciation

ValueDepreciationUsed Expense

\$25,000\$4,000\$21,0005 years\$4,200

Cost

÷

=

=

=

=

÷

Section 10.1: The Cost of Doing Business

### 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

### 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

### The Economicsof One Unit of Sale

10.2

• 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

### 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

### The Economics ofOne 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

Section 10.2: The Economics of One Unit of Sale

### EOU for a Wholesale Business

Section 10.2: The Economics of One Unit of Sale

### EOU for a Retail Business

Section 10.2: The Economics of One Unit of Sale

### EOU for a Business Selling More Than One Product

Section 10.2: The Economics of One Unit of Sale

### EOU for a Service Business

Section 10.2: The Economics of One Unit of Sale