Unit F: Finance

Business Expenses

When planning a new business, it is important to predict sales revenue and operational expenses. Identifying the expenses helps determine the amount the new business must earn in revenue to break even.

When operating a business, fixed costs are costs that do not vary or change from month to month. Variable costs are unpredictable costs that change in amount or frequency. In Lesson 2, fixed costs and variable costs of operating a vehicle were discussed.

Example 5

Before Aaron opened his new business, he analyzed the monthly costs. Since he planned to live on an acreage, he calculated that 30% of the acreage rental and utilities will be business related. Aaron identified the following monthly expenses.

the acreage rental is $900.00 and the utilities are $200.00 (30% for business)
$141.98 is required to pay back his start-up loan
$250.00 is allotted to maintenance for his machinery
$1 000.00 is designated for diesel fuel
business insurance costs are $120.00

Calculate the cost of the rental property and utilities required for the business.
Calculate the fixed costs and the variable costs for Aaron's business.
Calculate the total operating expenses for Aaron's business.

Solutions

To calculate the business cost of the rental property, multiply the rent by 30% (the percentage used for business).

$\begin{array}{rcl} cost of rental property & = & 30 % of $ 900.00 \\ = & 0.30 \times $ 900.00 \\ = & $ 270.00 \end{array}$

Note: the word "of" means multiply.

To calculate the business cost of utilities, multiply the utilities by 30% (the percentage used for business).

$\begin{array}{rcl} cost of utilities & = & 30 % of $ 200.00 \\ = & 0.30 \times $ 200.00 \\ = & $ 60.00 \end{array}$

Record the fixed costs and variable costs in a table.

Aaron's operational expenses
Fixed costs (per month)		Variable costs (per month)
rental of property	$270.00	utilities	$60.00
loan payment	$141.98	machinery maintenance	$250.00
business insurance	$120.00	diesel fuel	$1 000.00
total	$531.98	total	$1 310.00

The total fixed costs are $531.98 and the variable costs are $1 310.00.

To find the total cost, add the fixed costs to the variable costs.

$\begin{array}{rcl} total cost & = & fixed coss + variable costs \\ = & $ 531.98 + $ 1 310.00 \\ = & $ 1 841.98 \end{array}$

The total expenses each month are $1 841.98.