Costs

Costs of Doing Business

By Dewitt Johnson

​Because the cost of inputs influences efficient production decisions, a business must analyze costs before making its decisions.​

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​Measures of Cost

• Costs you can't change in the short run.

• ​The cost that a business incurs even if the plant is idle and output is zero.

• Sometimes called "Overhead"​

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Fixed Cost

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• ​Salaries paid to executives

• Interest charges on bonds

• Rent payments on leased properties

• Local and state property taxes.

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Examples of Fixed Costs​

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Multiple Choice

What are fixed expenses?

• Irregular expenses that change from week to week or month to month

• The amount of money in your bank account

• The amount of cash in your purse or wallet

• Expenses that stay the same from week to week or month to month

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​Variable Costs

• ​Cost that changes when the business rate of operation or output changes.​

• Like in the Theory of Production, it mainly applies to labor costs.

• Also includes​ raw materials.

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Variable Cost Examples

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• ​Wage-earning workers may be laid off or worked overtime as output changes.

• ​Electric power to run the machines.

• ​Freight charges to ship the final product.

Multiple Choice

You own a restaurant and every month you must pay your water bill. However, you never know how much that bill will be because the amount changes based upon how much water your business uses.  This is a...

• FIXED cost.
• VARIABLE cost.

• The sum of the fixed and variable costs.​

• ​Total cost takes into account all the costs a business faces in the course of its operations.

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Total Costs​

• ​Fixed - Cost of the lot, ​pumps and tanks, and taxes and permits.

• Variable - ​Wages for employess, electricity and gas costs.

• The owner may operate the station 24 hours a day for a low cost.​

Costs of a Gas Station

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-Break-even point is the total output or total product the business needs to sell in order to cover its total costs.

​-A business wants to do more than break even, however. It wants to make as much profit as it can.

Break-Even point

Multiple Choice

Fixed cost + variable cost =

• average costs

• total costs

• marginal costs

• unit costs

Multiple Choice

When a business has made enough money to pay its costs and begin to make a profit, it has reached its

• break-even point
• variable-cost margin
• fixed cost
• selling price