Page 218 - Cambridge IGCSE Business Studies

Cambridge IGCSE Business Studies Section 4 Operations management

ACTIVITY 16.1

Khaliq, the owner of The Casual Shoe Company (TCSC), knows that it is important to classify costs properly when making
business decisions. He has asked you to help him classify the following costs. Copy and complete the table below. The first
cost has been completed as an example.

Fixed Variable
Factory rent √
Leather used in making some shoes
Electricity used to power machinery
Machinery maintenance
Advertising
Production workers’ wages
Operation Manager’s salary
Delivery of finished goods to customers
Safety equipment for production workers

The costs of producing 2,000 units
9
8

216 7
6
KEY TERM 5
$000s
Average costs: the cost of 4
producing a single unit of output.
3
2
1
Figure 16.1 Total cost = fixed costs +
0
total variable costs Fixed Costs Variable Costs Total Costs

EXAMPLE

TCSC has monthly fixed costs of $2,000. The variable cost per pair of shoes is $3. In January TCSC makes 1,000 pairs of shoes.
The total variable cost of producing 1,000 pairs of shoes in January will be:
1,000 × $3 = $3,000
TCSC’s total costs for January will be:
Monthly fixed cost + total variable costs for January
$2,000 + $3,000 = $5,000
Average cost is the cost of making one unit of output. It is calculated as follows:
Average cost = Total cost/output

This is an important cost concept because businesses often use average cost as the basis for calculating a product’s price.
We can calculate TCSC’s average cost of producing one pair of shoes in January.
$5,000/1,000 = $5