Of the basic business principles, economies of scale has the greatest impact on profitability over any other business principle. As an enterprise’s investment is spread over higher volume the cost per unit of production decreases. The differential between sales price and cost changes add to the overall profitability for the company.
Contribution margin equals price minus variable costs. It is a cost accounting concept and a fundamental principle of business. Most often used to identify the amount of dollars to offset fixed costs of operations. Although simple in concept, it’s formula can get convoluted as it is applied towards more complex production systems.
Breakeven analysis is a managerial (cost) accounting tool used to examine the relationship of price to cost of a product. It also considers various sales volumes and the effect on profit given the different relationships of price to cost. The breakeven analysis is an essential tool in maximizing profit with the least amount of resources.
In business the best source of new business is the existing customer. Discovering the customer’s habits and characteristics allows the sales department to expand into new geographical territories with similar customer characteristics and/or modify the existing product lines. The key to success is gathering the proper information at the point of sale.
The scholarly definition and reality are two different perspectives. The student is taught that marginal revenue equals the additional dollars generated for an additional single unit of sales. It is literally taken right down to the micro measurement. This is simple to understand but in small business, the scope of its meaning and impact are substantial to the bottom line.
Many restaurant owners and managers do not understand the difference between their fixed and variable costs. The problem with defining fixed and variable costs in a restaurant relate to their connection with sales. In addition, reasonable assumptions have to be made in order to delineate between fixed and variable costs in the food service industry.
This article will explain the difference between fixed and variable costs in a restaurant, provide examples of both and educate the reader on proper analysis procedures to create baselines for improvement. I am a big believer in the feedback loop method of business operations in order to maximize profit and reduce overall stress for the owners and management team.
Mixed costs are a more advanced business concept. Mixed costs refer to a combination of both a fixed and variable component. A common error made by most small business entrepreneurs is the misapplication of the formula. Many small business owners understand the textbook definition but rarely exercise the concept in reality.
There are a multitude of principles used in business, some are industry specific, others are functions of business. But there is one that is a general principle that is used across the board in all areas of business. It is called the ‘Substitution Principle’. It works just like the substitution principle in math that we all learned about in algebra.
Marcus Lemonis is the star of a TV series show called ‘The Profit’. He helps failing business turn around and become successful operations by fixing the three core elements of every business. He refers to these elements as the 3 P’s: People, Process and Product. It is an interesting show as it falls into the same arena as this website.
‘Fixed costs’ is a business term used mostly in cost accounting. It has several meanings based on its usage. The most common definition associated with fixed costs is expenses that must be paid regardless of production or sales volume. The best example is rent for a company. It doesn’t matter whether you produce or sell one widget or several thousand, the rent must still be paid.
So why is it important to understand fixed costs? How is it used in cost accounting and in financial reporting? Finally, what are examples of fixed costs?