Expense Structure and Forecasting Study Questions

1. What kinds of expense are included in Cost of Goods (also known as Direct
Costs)?
Expenses directly associated with producing and making a specific
product. Companies differ as to which expenses they attribute to cost
of goods, but generally items such as source materials, direct labor,
and freight are included.
2. What kinds of expense are NOT included in Cost of Goods?
Excludes indirect expenses such as distribution costs and sales force
costs.
3. What kinds of expense are included in Fixed Costs (also known as Overhead
or Indirect Costs?)
Ongoing expenses or overhead of a business that occur regardless of
the amount of sales. These expenses usually include items such as
rent, utilities, salaries.
4. What kinds of expenses are NOT included in Fixed Costs?
5. What

6. What

kinds of expenses are included in Capital Expenditures?

Purchase of necessary equipment or property (lasts longer than a year)
kinds of expenses are NOT included in Capital Expenditures?
Expenses that dont last longer than a year.

7. What is Gross Profit? What is Gross Profit Margin? What would cause it to be
negative?
Gross profit is a companys total revenue (equivalent to total sales)
minus the cost of goods sold. Gross profit is the profit a company
makes after deducting the costs associated with making and selling its
products, or the costs associated with providing its services.
Gross Profit Margin: average percentage of gross income realized after
cost of goods
A negative gross profit margin occurs when costs exceed revenue.
8. How do you calculate Break Even Point?
a. How do you calculate it if you know your price per unit, direct cost per
unit, and total fixed costs?

b. How do you calculate it if you know your direct cost per unit, total fixed
costs, and expected volume, and need to calculate breakeven price per
unit?

c. How do you calculate it if you know your maximum price per unit, total
expected unit volume, and your total fixed costs, and need to calculate
maximum direct cost per unit?

Try these examples:

a. You can charge $20 per lipstick. The cost of lipstick and packaging is
$2 per lipstick. Your fixed costs for management salaries, office space,
advertising, insurance, and lawyers is $100,000/year. How many units
do you need to sell to break even?
b. You can get umbrellas made in China for $2 each. You expect to sell
3,000 umbrellas per year. Your fixed costs for management salaries,
rent for the umbrella store, and legal fees is $40,000/year. How high
does your selling price per umbrella need to be to break even?
c. You know you can sell bottles of hot sauce for $10 each and your total
fixed costs for management salaries, legal fees, advertising, and
kitchen rent are $225,000/year. You believe you can sell 60,000
bottles/year. What is the maximum direct cost you can spend per
bottle in order to break even?
Solutions:
a. $100,000 fixed cost / ($20 - $2) gross profit = 5,556 units to break
even
b. $40,000 fixed costs / 3000 units sold = $13.33 fixed cost/unit + $2.00
direct cost per unit = $15.34 minimum price to break even
c. $225,000 fixed costs / 60,000 units sold = $3.75 fixed costs/unit. $10
price/unit - $3.75 fixed cost/unit = $6.25 maximum direct cost/unit to
break even