THE ENTERPRISE THEORY
-
COST FUNCTION
SALES
NET PROFIT
.
Tomáš Pražák




  C = f ( Q ) = ( v x Q ) + F
C = V + F
where
F … total fixed costs [CZK]
v … unit variable costs [CZK/piece, CZK/kg, CZK/l, …]
V … total variable costs
Q … volume of production [pcs, kg, l, …]

Use of cost functions in business practice
•how the amount of costs changes depending on the volume of production
•which part of the costs is dependent on the volume of production and which is not
•the starting point for a more qualified decision in a number of areas:
odetermine the amount of costs corresponding to different volumes of production
ocompetently determine the economic result
odetermine what volume of production ensures the desired profit

Example: Lovers of theatrical performances of the children's theater can purchase a year-long
season ticket for 2 children. The price of this season ticket is CZK 2,000. The entrance fee for
one performance for one child in a popular line in the theater is 150 CZK.
a)What are the costs associated with visiting three shows with/without a season ticket if two
children go to the theater?
b)How many times does a pair of children have to visit the theater to make the purchase of a season
ticket worth it?




The two-period method
•it only works with data on two periods - with the maximum production volume Q MAX  and with a
minimum production volume Q MIN and their corresponding costs C QMIN  and C QMAX
•we insert the data into the general form of the cost function and then solve the resulting system
of two linear equations
•it should not be a period however extraordinary
C Qmax = (v x Q max ) + F
C Qmin = (v x Q min ) + F

Example: The following table shows data on production volumes and total costs in individual months
of last year of the company XYZ, s.r.o. Use the two-period method to determine the cost function.

Production volume [pcs]
Costs [CZK]
January
10,500
165,000
February
9,500
148,000
March
9,000
145,000
April
10,600
151,000
May
10,400
163,000
June
9,200
148,000
July
8,500
135,000
August
9,600
145,000
September
10,000
167,000
October
10,800
158,000
November
11,000
162,000
December
10,900
161,000




  S = (p x Q )
where
p ... selling price per piece [CZK/piece]
Q … volume of production [pcs, kg, l, …]
SALES