# Understanding and Managing Start Up & Variable Costs Worksheet

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Economics
Type
Case Study
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Tutorial chapter 7 : Understanding and Managing Start-up, Fixed, and Variable Costs
Topic 1: Research the cost
1. Classifying Costs
Fixed or variable
Wages of workers
Depreciation, plant and equipment
Shop assistant wages
Delivery costs
Raw materials handling costs
Production run set up costs
Electricity
Research and development expense
Sales commissions
2. Vinny Ltd is a firm that makes a single product. During March, 4000 units of
Vinny Ltd’s product were manufactured, incurring the following costs:
\$
Raw Materials
20,800
Factory depreciation expense
40,500
Direct Labour
49,600
Production managers salary
5,000
Computer rental expense
3,100
Maintenance supplies used
600
a) How much cost would you expect to be incurred for each of the items during
April when 5600 units of the product are planned for production?
b) Calculate the average total cost per unit for the 4000 units manufactured in
March. Explain why this figure would not be useful to a manger interested in
predicting the cost of producing 5600 units in April.
3. ‘Over It Ltd’ have provided you with the following information for the month of
December
Sales (8,200 units) totalled \$262,400. The manufacturing expenses were all variable and
totalled \$70,000. There were \$86,400 of fixed expenses during December and the variable
operating expenses were \$94,000.

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1. Rearrange the information above into contribution margin format, allowing you to
calculate the profit achieved.
2. What is the selling price per unit?
3. What is the variable cost per unit?
4. Calculate break-even in units. Show your workings.
5. Calculate break-even in \$. Show your workings
Changes to production are planned for next year. Management is considering cutting
down labor cost by increasing automated production with the hiring of a machine. The
changes would mean variable costs would reduce to \$14 per unit, but fixed expenses
would increase to \$135,600 per month. Re-create the contribution margin format to
reflect this new cost structure.
6. Calculate profit at a volume of 7,800 units with the new cost structure.
7. Calculate break-even point in units with the new cost structure (ie with the hiring of
the machine). Round up to the nearest unit.
8. Calculate the number of units that would need to be sold in a month with the new cost
structure, to achieve the same profit achieved previously in (a) (ie before the hiring of
9. Do you recommend management hire the machine? Give reasons for your answer.
4. Super Saucepans
‘Super Saucepans’ is a business that manufactures long-lasting, high performance, non-stick
saucepans. The following information relates to the 12 months ending 30 July 2009:
Units produced 32,000
Selling price per unit \$ 60.00
Variable manufacturing cost per unit \$ 30.00
Fixed manufacturing costs (per year) \$ 120,000
Variable non-manufacturing costs per unit \$ 12.00
Fixed non-manufacturing costs (per year) \$ 360,000
Required:
1) Calculate break-even in units. Show your workings.
2) Calculate break-even in \$. Show your workings.
3) Calculate the profit achieved. Use contribution margin format.
4) Changes in the marketing strategy are planned for 2010. This would increase variable
non-manufacturing costs by \$4 per unit, and reduce fixed non-manufacturing costs by
\$80,000 per year. Calculate the number of units that would need to be sold in 2010 to
achieve the same profit as in 2009. Show your workings.
Topic 2: Calculate Free Cash Flow
Formula:
FCF= Operating cashflow - Changes in networking capital Initial investment + Tax effects
OCF: is defined as cash generated from a normal business
NWC: is the difference between inventory, account receivable and account payable.
Initial investment: capital invested for start-up
Tax effects: tax avoidance when selling the plant, property, equipment after a project/start-up
has done

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