MODULE THREE

THE ECONOMICS OF
TECHNOLOGY MANAGEMENT

ENGR.(MRS) OBANLA .O
C O S T S
 COSTS
Capital Costs
• fixed expenses incurred on the purchase of land,
buildings, construction, and equipment used in
the production of goods or in the rendering of
services.
• total costs needed to bring a project to a
commercially operable status.
 Capital Costs
• are not limited to the initial construction
of a factory or other business. For
instance, the purchase of a new machine
to increase production and last for years is
a capital cost.
• include expenses for tangible goods such
as the purchase of plants and machinery,
as well as expenses for intangibles assets
such as trademarks and software
development.
 Total Cost
• This is the overall expenditure involved in
producing a given quantity of output.

• It is obtained from the summation of fixed

cost and variable cost.
 Total Costs
–Fixed costs are those costs that do not
vary with the quantity of output
produced. E.g. Building, land, machinery.

–Variable costs are those costs that do

vary with the quantity of output
produced. E.g. material costs.
 Total Costs

Total Fixed Costs (TFC), Average Fixed Costs (AFC),

Total Variable Costs (TVC), Average Variable Costs (AVC),
TC = TFC + TVC
Total Fixed Cost TFC
AFC = =
Quantity Q
Total Variable Cost TVC
AVC = =
Quantity Q

Total cost TC
ATC  
Quantity Q
 Total Costs

Marginal Cost
– Marginal cost (MC) measures the increase in
total cost that arises from an extra unit of
production.

– Is the additional cost incurred by producing an

additional unit of output.

– Is also called Incremental cost

 Total Costs

– Marginal cost helps answer the following

questions:
• How much does it cost to produce an additional unit of
output?
• Is it profitable to increase output?

(change in total cost) TC

MC  
(change in quantity) Q
Examples
 Examples
1. Given that the average fixed cost is #1,000 and
the average variable cost is #2,500. Find the
total cost of production if the output is 100
units.
2. A man produces 100 units of goods at #6,000
with a total fixed cost of #1,000. Calculate his
i. Average variable cost
ii. New average variable cost, if the marginal cost
is #2 when 200 units are produced (Assume
total fixed cost remains the same).
 Examples
3. Copy and complete the table below
Unit of Total Total Total Average Average Average Marginal
Output Fixed Variable Cost Variable Fixed Total Cost
Cost Cost Cost Cost Cost #
# # # # # #
1 20 30

2 20 36

3 20 40

4 20 44
 Exercises
1. Using the Table above, make plots of AFC, AVC, ATC
and MC against Quantity on same axes.
2. Considering the Table below, plot TC and MC
against Quantity on same axes. Interpret the graphs.

Quantity Total Marginal Quantity Total Marginal

Cost Cost Cost Cost
0 $3.00 —
1 3.30 $0.30 6 $7.80 $1.30
2 3.80 0.50 7 9.30 1.50
3 4.50 0.70 8 11.00 1.70
4 5.40 0.90 9 12.90 1.90
5 6.50 1.10 10 15.00 2.10
COST – VOLUME - PROFIT ANALYSIS

Cost – Volume - Profit (CVP) Analysis

• is a systematic approach of determining and
monitoring changes among volume of output,
revenue, total cost and profit.
 COST – VOLUME - PROFIT ANALYSIS
Importance of CVP Analysis
• It is a good tool in decision making
• It enables management to predict how financial
sheet will look like when there is change in
business activities
• It helps in the determination of break-even point
and the level of output to achieve a desired profit
• It helps to forecast the level of sales required to
maintain a given amount of profit at different
prices
 COST - VOLUME - PROFIT ANALYSIS
From TC = TVC + TFC
TC = mx + F
where
F = Total Fixed cost
m = variable cost per unit
x = total output (quantity)
 COST - VOLUME - PROFIT ANALYSIS
Revenue (R)
is the total payment received from selling a good or
performing a service.
R = px
where
p = sales unit price

Profit (P)
is the money earned after deducting total cost from
the revenue
P = R – TC
P = px - mx - F
COST - VOLUME - PROFIT ANALYSIS
Marginal Revenue
– Marginal Revenue (MR) measures the increase
in total revenue that arises from an extra unit
of commodity.
– Is the additional income earned by selling an
extra unit of commodity.

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 ∆𝑅
Marginal Revenue = =
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑂𝑢𝑡𝑝𝑢𝑡 ∆𝑄
 COST - VOLUME - PROFIT ANALYSIS
Break-Even Point
is the point in business transaction when the
revenue is the same as the total cost.
At this stage, no profit is made (P = R – TC = 0)
R = TC
px = mx + F
px - mx = F
x(p – m) = F
F
x=
p−m
i.e x = break-even volume at the given m and p.
 Exercises
1. Copy and complete the table below
Quantity sold Total Average Revenue Marginal
(Output) Revenue (Unit Price) Revenue
# # #
0 0 0 0
1 400 400 400
2 700 350
3 900 200
1040 260 140
5 1150 230
6 200 50
 Exercises
2. Copy and complete the table below
Output Total Marginal Total Marginal
of beans Revenue Revenue Cost Cost
(kg) # # # #

10 150 - 250 -
20 5 300
30 350 13
40 450 500 7
550 5 550
60 600 580 3
70 630 700 12
 Test 2
Output Total Marginal Total Cost Marginal
(unit) Revenue Revenue # Cost
# # #
10 150 - 250 -
20 5 300
30 350 13
40 450 500 7
550 5 2.5
65 600 580 6

•What is the present value of # 250,000 which you saved in your account
15 years ago at the rate of 12 percent?
•Copy and complete the table.
At break-even point, if the total fixed cost is #84 and variable cost per
unit is #11.40, what is the sales unit price?
 Solution
Using FV = PV (1 + r)𝑛
FV =?
PV = # 250,000
r = 12%
n = 15 years
Hence FV = PV (1 + r)𝑛
= # 250,000 (1 + 12/100)15
= # 250,000 (1.12)15
= # 1, 368, 391.44
That is, after 15 years, # 250,000 becomes
# 1, 368, 391.44
 Solution
Output Total Marginal Total Cost Marginal
(unit) Revenue Revenue # Cost
# # #

10 150 - 250 -
20 200 5 300 5
30 350 15 430 13
40 450 10 500 7
60 550 5 550 2.5
65 600 10 580 6

The required equations are

change in Total Revenue
Marginal Revenue =
change in Output
change in Total Cost
Marginal Cost =
change in Output
 Solution
• #200 (Total Revenue) is obtained from
change in Total Revenue X−150
Marginal Revenue = , 5 = ,5=
change in Output 20 −10
X−150
, X – 150 = 50, X = #200
10
• #5 (Marginal Cost) is obtained from
change in Total Cost 300 − 250 50
Marginal Cost = = = = #5
change in Output 20 −10 10
• #15 (Marginal Revenue) is obtained from
change in Total Revenue 350 − 200 150
Marginal Revenue = = =
change in Output 30 −20 10
= #15
• #430 (Total Cost) is obtained from
change in Total Cost X−300 X−300
Marginal Cost = , 13 = , 13 =
change in Output 30 −20 10
, X – 300 = 130, X = #430
 Solution
• #10 (Marginal Revenue) is obtained from
change in Total Revenue
Marginal Revenue =
change in Output
450 − 350 100
= = = #10
40 −30 10
• 60 units (Output) is obtained from
change in Total Revenue
Marginal Revenue = ,
change in Output
550−450 100
5 = ,5= , X = 60
X −40 X−40
 Solution
• #550 (Total Cost) is obtained from
change in Total Cost
Marginal Cost = ,
change in Output
X−500 X−500
2.5 = , 2.5 = , X – 500 = 50, X = #550
60 −40 20
• #5 (Marginal Revenue) is obtained from
change in Total Revenue 600 − 550
Marginal Revenue = =
change in Output 65 −60
50
= = #10
5
 Solution
• At break-even point, if the total fixed cost is #84 and variable
cost per unit is #11.40, what is the sales unit price?
• At break-even point,
Total Revenue = Total Cost = #550 , Output = 60 units
Total Fixed cost, F = #84
Variable cost per unit (m) = #11.40
Sales unit price = ?
F
Using Output (x) =
p−m
Hence,
#84
60 =
p − #11.40
60p - #684 = #84
60p = #684 + #84 = #768
p = #12.80
Sales unit price is #12.80, at break-even point
 Profitability
• is a way to measure a company's performance
and the effectiveness of the management.

• is the state or condition of yielding a financial

profit or gain.

• is simply the capacity to make a profit, and a

profit is what is left over from income earned
after deducting all costs and expenses related to
earning the income

• Profit = Total revenue - Total cost

 Profitability Ratio
Types of Profitability Ratio
• Gross Profit Percentage (GPP)
• Net Profit Percentage (NPP)
• Returns on Capital Employed (RoCE)
• Returns on Sales (RoS)
• Returns on Investment (RoI)
• and others
 How To Measure Profitability Ratio
• Net Profit Percentage
It is expressed as
Net Profit after tax
NPP = X 100 %
Sales

• Gross Profit Percentage

It is expressed as
Gross Profit
GPP = X 100 %
Sales
 How To Measure Profitability Ratio
• Returns on Capital Employed
It is expressed as
Net Profit
RoCE = X 100 %
Capital Employed

Capital employed = Total Assets or

= Total Assets - Liabilities
 Example
The following information was extracted from the
business book of Kelvin Nigerian Limited for September
2015.
Sales #60,000
Expenses #7,500
Gross Profit #15,000
Net Profit #7,500
Capital #28,000
You are required to calculate the following profitability
ratios:
• Gross profit percentage
• Net profit percentage
• Expenses as a percentage of sales
• Return on capital employed
 Solution
• Gross profit percentage
Gross Profit #15000
GPP = X 100 % = X 100 % = 25%
Sales #60000
• Net profit percentage
Net Profit #7500
NPP = X 100 % = X 100 % = 12.5%
Sales #60000
• Expenses as a percentage of sales
Expenses #7500
= X 100 % = X 100 % = 12.5%
Sales #60000
• Return on capital employed
Net Profit #7500
= X 100 % = X 100 % = 26.3%
Capital #28500
 Exercise
The following information was extracted from the business
book of Kelvin Nigerian Limited for October 2015.
Sales #65,000
Expenses #7,500
Profit before Tax #18,000
Tax #8,000
Fixed Assets #15,000
Variable Assets #33,750
Current Liabilities #3,750
Calculate the following profitability ratios:
Gross profit percentage, Net profit percentage, Expenses as a
percentage of sales, Rate of return on capital employed
 2015/2016 Exam Question
Copy and complete the table. At break-even point, if the total fixed
cost is #85 and variable cost per unit is #11.50, what is the sales unit price?

Output Total Marginal Total Marginal

Revenue Revenue Cost Cost
(unit) (#) (#) (#)
(#)
10 150 - 250 -
20 5 300
30 350 13
40 450 500 7
500 2.5 2.5
65 600 10