Knowing the cost structure of your business

When a business or manager refers to their cost structure, they are talking about the composition of the costs of the business. Typically, costs are either fixed or variable. Fixed costs stay the same regardless of what happens e.g. how much is sold. Variable costs increase or decrease in line with business activity e.g. the more product sold, the higher the purchase or manufacturing costs. It goes without say that a business manager needs to have a full knowledge of how their business responds to changes in output and how the business itself actually operates.  I read a great example of this back in June this year in the Guardian.  The article mentioned how Ryanair had started talks with a Chinese aircraft manufacturer (Commercial Aircraft Corporation of China) in an effort to build a cheaper alternative to its current aircraft, the Boeing 737. What struck me was not the cheaper cost of the aircraft, but attempts by Ryanair to design the aircraft with exactly 200 seats – about 15 more than the Boeing. Why 200 seats? Simple answer actually, anything above 200 seats and one additional crew member is needed.  Keeping the seats at 200 means that each extra seat could yield anaverage profit of about €40 per seat.  Now that’s knowing your cost structure and operations in detail


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About martinjquinn

I am an accounting academic, accountant and author based near Dublin, Ireland.

One response to “Knowing the cost structure of your business”

  1. lecturersnotes says :

    In that case I would even claim that Ryanair knowing its own cost structure enabled them to offload most of their own ‘baggage’ onto the customer. Or in other words: Ryanair managed to skyrocket total customer cost whilst decreasing their own (non-monetary “cost” not included)!

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