<3.3 COSTS & REVENUE>

--COST CLASSIFICATIONS--

--FIXED vs VARIABLE COSTS--

--FIXED--

--VARIABLE--

Create a two column table with 5 examples of fixed costs in the left column and 5 examples of variable costs in the right column @TES, in this case output refers the number of students we teach.

Quickly sketch a diagram with 'Quantity (Q)' on the x-axis and 'Cost ($)' on the y-axis, then sketch the variable cost and fixed cost curve, explaining their shape.

Using Table 2, calculate the following forecasted figures for 2018:

total variable costs

2017: $6 * 75,000 = $450,000

2018: 75,000 + 10% = 82,500, ($6 + $1.00) $7 * 82,500 = $577,500

--DIRECT vs INDIRECT COSTS--

--DIRECT--

DIRECT COSTS refer to those costs that can be TRACED SPECIFICALLY to the production of a unit of output and can be measured DIRECTLY.
In other words, these costs wouldn't exist without producing the unit.
Most direct costs are 'VARIABLE' in nature as they change when utput changes.

--INDIRECT--

INDIRECT COSTS (also commonly known as 'Overheads') refer to costs that can't easily be traced back to a single unit of output and instead have to be 'INDIRECTLY ALLOCATED' to the unit by getting the total and dividing it by the quantity.
In other words, these costs would still exist without producing the unit.
Most indirect costs are 'FIXED' in nature as they do not change as with output.

--EXAMPLES--

--EXAMPLES--

salaries
insurance
depreciation of equipment
equipment maintenance
facility rent
utilities
office supplies
advertising and marketing
- - - - PRODUCTION OVERHEADS – these include factory rent and rates, depreciation of equipment and power.
        SELLING AND DISTRIBUTION OVERHEADS – these include warehouse, packing and distribution costs, and salaries of sales staff.
        ADMINISTRATION OVERHEADS – these include office rent and rates, clerical and executive salaries.
        FINANCE OVERHEADS – these include the interest paid on loans.

Identify a minimum of two costs per category that TES pays. Assume that the product we produce are the 80 minute lessons.

--TOTAL--

TOTAL REVENUE can be calculated by multiplying the quantity of products sold by the selling price. (Price * Quantity)

--REVENUE STREAMS--

REVENUE STREAMS refer to the SOURCES OF INCOME/REVENUE that a particularly company has access to. There can of course be just a single stream or multiple types.

--BENEFITS--

The BENEFITS of having more than one source of income include:

it should lead to HIGHER TOTAL REVENUE for the business
it is a WAY TO SPREAD RISK BY DIVERSIFICATION, as other income sources can be used to cover losses of income in other streams..

Businesses may receive income from revenue streams other than their normal operating or trading activities, for example from:

--DRAWBACKS--

The DRAWBACKS to developing a range of income generating activities include:

Each activity needs to be managed and controlled and this makes MORE WORK – and this could be a significant drawback for an entrepreneur or sole trader.
A large number of activities can result in a BUSINESS LOSING FOCUS and being less likely to make a success of its central and original business activity.

Imagine you are the TES Business Development Officer and you have been asked by the CEO to explain your thinking with regards to revenue streams at TES.
"As you know our core business is providing educational services as such our main revenue stream comes from..., however we also have the following sources of revenue....this is great as...., however we don't want to..."

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