6 Volkswagen’s sales rose to 1,058,000 cars from 996,000 a year earlier.

3. Choose the correct expression from C opposite to describe Nordsee Marine’s costs.

1. the salary of an office receptionist (direct / indirect cost)

2. heating and lighting of the building where the boats are made (fixed / variable cost)

3. The materials used in the boats, and the boatbuilders’ salaries (overhead cost / cogs)

4. running the office (overhead / direct cost)

5. wood used in building the boats (fixed / variable cost)

6. the salary of a boatbuilder (direct / indirect cost)

27.4 Look at D opposite. Read what this company owner says and answer the questions.

‘I’m Vaclav and I own a small furniture company in Slovakia. We make a very popular line of wooden chairs. Each costs 360 korunas to make, including materials and production. We estimate overheads, including administration and marketing costs, at 40 korunas for each chair, and we sell them to furniture stores at 500 korunas each.’

1. What is the gross margin for each chair?

2. What is the net margin for each chair?

3. What is the mark-up for each chair as a percentage of total costs?

4. What is the profit margin for each chair as a percentage of the selling price?

Think of the company you work for or one you would like to work for. Which of its products or services has the highest sales? What are its biggest costs?

Profitability and unprofitability

Profitable and unprofitable products

A supermarket manager talks about the costs and prices for some of its products.

Product Cost per Sale price per Result unit (euros) unit (euros)

12

10

We make a profit: the product is profitable or profit-making.

15

15

B

~c~

We break even: we reach break-even point.

We make a loss. The product is loss-making, but we use Product C as a loss leader to attract people to the store, as we know they will then also buy profitable products.

22

12

D

^Product D is very profitable and we sell a lot ofN, it. It’s one of our money-spinners or cash cows, ) products that have very good profitability,

Budgets and expenditure

Like all companies, Nordsee and Vaclav have to budget for, or plan, their costs, and have a budget. Look at the graphs comparing their planned budgets with their actual expenditure (what they actually spent).

Euros 1200000 1 000000 800000 600000 400000 200000 0

Euros 1 200000 1000000 800000 600 000 400000 200000 0

Actual

expenditure

Budget

Nordsee's

spend

Actual Budget expenditure

Vaclav's

spend

Euros 1200000 1 000000 800000 600000 400000 200000 0

NORDSEE

Nordsee went over budget and overspent by 200,000 euros.

VACLAV

Vaclav underspent by 50,000 euros. He was under budget.

ADVERTISING EXPENDITURE

On advertising, Vaclav’s spend was only 200,000 euros, while Nordsee’s advertising spend was 700,000.

Note: Spend is usually a verb, but it can also be a noun, as in advertising spend.

Economies of scale and the learning curve

Ford is one of the biggest car companies in the world. It benefits from economies of scale. For example, the costs of developing a new car are enormous, but the company can spread them over a large number of cars produced and sold. In dealing with suppliers, it can obtain lower prices, because it buys in such large quantities.

The company also benefits from the experience curve or learning curve: as it produces more, it learns how to do things more and more quickly and efficiently. This brings down the cost of each thing produced, and the more they produce, the cheaper it gets.

	Unit production cost (korunas)	Overheads per unit (korunas)	Selling price (korunas)	Number of units sold per year
Chairs	360	40	500	50,000
Stools *	180	20	195	70,000
Armchairs	700	70	800	20,000
Coffee tables	550	50	600	30,000
Dining tables	2500	300	3000	15,000

* chairs with three legs and no hack