Unit 2: Managing Financial Resources
and Decision
» Managing Financial Resources and Decisions
»The Basic Syllabus
» Understand the sources of finance available to business.
» Understand the implications of finance as a resource
within a business
» Be able to make financial decision's based on financial
information
» Be able to evaluate the financial performance of a
business.
»LEARNING OBJECTIVE
» At the end of the class students should be able
to:
» Explain the calculation of unit costs and make
pricing decisions using relevant information
»OVERVIEW
» Managers make decisions that govern how a
company reaches its goals. Many of these goals
have financial aspects, such as revenue and profit
targets. The level of costs included in such decisions
has a major impact on the finances of the company.
Reliable reporting of actual costs, accurate
estimation of projected costs and the appropriate
integration of such costs in managerial decisions is
a key component of business operations that meet
their targets and further the goals of the company.
»UNIT COSTS
» The cost incurred by a company to produce, store
and sell one unit of a particular product. Unit costs
include all fixed costs (i.e. plant and equipment)
and all variable costs (labor, materials, etc.)
involved in production.
» Unit cost is an important metric to look at when
evaluating a "unit grower" stock, or a stock that
chiefly produces items that have a low fixed cost.
Generally, the larger a company grows, the lower
the unit cost it can achieve through economies of
scale.
» CALCULATING UNIT COST
»
The cost per unit calculation is:
»
»
(Total fixed costs + Total variable costs)
Total units produced
»
The cost per unit should decline as the number of units produced increases,
primarily because the total fixed costs will be spread over a larger number of units
(subject to the step costing issue noted above). Thus, the cost per unit is not
constant.
»
For example, ABC Company has total variable costs of $50,000 and total fixed costs
of $30,000 in May, which it incurred while producing 10,000 widgets.
The cost per unit is:
($30,000 Fixed costs + $50,000 variable costs) / 10,000 units = $8 cost per unit
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In the following month, ABC produces 5,000 units at a variable cost of $25,000 and
the same fixed cost of $30,000. The cost per unit is:
($30,000 Fixed costs + $25,000 variable costs) / 5,000 units = $11/unit
»Unit Cost use within pricing decisions
» When all your variable costs for the accounting period,
are added up and are divide by the number of units
sold, you will arrive at the cost per unit. This cost should
remain constant, regardless of how few or how many
units you sell.
» If yours is a service business, you may be able to divide
your variable costs by the number of jobs performed (if
the jobs are essentially similar) or by the hours spent on
all jobs (if the jobs vary greatly in size).
»Sensitivity analysis
» Sensitivity analysis is an analysis that finds out how
sensitive an output is to any change in an input
while keeping other inputs constant.
» In corporate finance, it refers to an analysis of how
each of the input variables in a capital budgeting
decision (such as discount rate, cash flows growth
rate, tax rate, etc.) affects the net present value,
IRR or any other output while keeping other
variables constant.
» Sensitivity analysis
» Sensitivity analysis is useful because it
tells the model user how dependent
the output value is on each input. It
gives him an idea of how much room
he has for each variable to go adverse.
It helps in assessing risk.
»REVIEW QUESTION
» 1.A set of tires for your car costs $550.00. What is the cost
for 1 tire?
» 2. Sally goes to Chin’s gas station and buys 25 liters of gas
for $2,900.00. Jane goes to gas station Ruby’s and buys 10
liters of gas for $3,500.00. Who paid more per liter ?
» What is the price per liter?
References
»
[online] Available at: http://Importance of Costing in Managerial Decision Making by Bert Markgraf,
Demand Media [Accessed 10 Feb. 2015].
»
Investopedia,
(2006).
Unit
Cost
Definition
|
Investopedia.
[online]
http://www.investopedia.com/terms/u/unitcost.asp [Accessed 11 Feb. 2015].
»
Bizfilings.com, (2015). Analyzing Your Financial Position - Small Business Guide | BizFilings Toolkit.
[online] Available at: http://www.bizfilings.com/toolkit/sbg/finance/your-financial-position [Accessed 11
Feb. 2015].
Available
at:
Termsexplained.com, (2015). Sensitivity Analysis | Definition | Explanation |
Example. [online] Available at: http://termsexplained.com/167040/sensitivity-analysis
[Accessed 11 Feb. 2015].
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