19 Cost, scale of production and break even Flashcards
total cost formula
Total cost = Fixed costs + Variable costs
average cost formula
aka
Average cost = Total cost/output
aka unit costs
How can cost data be used
Setting prices - Cost plus pricing. If avg cost = 5 usd, and you wanna make a profit of 1 usd per unit then set price at 6 usd etc .
Deciding to stop or cont production - When costs > revenue then business may decide to stop production, or cut down costs, etc.
What are the 5 economies of scale
Purchasing
Marketing
Financial
Managerial
Technical
What are Financial EOS
Larger companies can borrow more money from banks at a lower rate of interest, hence its cheaper for them to borrow.
This is becuase they can put up more assets as collateral.
What are Managerial EOS
Larger companies can afford specialists and this increases their efficiency and helps to reduce their average costs.
What are Purchasing EOS
They are able to buy raw materials etc in bulk which they usually get discounts on. This reduces the total cost, hence reducing the average cost.
What are marketing EOS
Advertising costs do not go up in the same proportion as the size of an advertisement ordered by the business.
Larger businesses may order for bigger advertisements that could be more cost effective.
What are Technical EOS
what is flow production
The use of flow production and the latest equipment will reduce the average costs for the large manufacturing businesses
flow production = division of labour and specialization
small business usually can’t afford
Name the DEOS
Poor communication
Lack of commitment from employees
demotivation
Weak coordination
Explain Poor communication DEOS
Becomes increasingly difficult to send and receive accurate messages across larger firms. This leads to slower and less accurate messages that can lead to inefficacy or mistakes.
Explain lack of commitment from employees/demotivation DEOS
also explain the “opposing” point
As organisations get larger and larger, employees may feel like they’re not valued in the firm and may not be able to get in contact with the top management in the firm. This would demotivate and lead to a lack of commitment of the workers them which could lead a reduction in output.
Furthermore if the employees are demotivated and there is a lack of commitment, the turnover rate of employees could be high. This means that they would be constantly leaving and the firm would have to invest valuable time and resources to replace the employees which could lead to a higher avg cost.
On the contrary - if the firm is bigger and the chain of command is bigger then there are more positions for promotion that could also motivate the employees to work harder and move up in the firm.
Explain weak coordination DEOS
Takes time for decisions taken by managers to reach all the different employees and departments. Makes it hard to coordinate between departments so that they are all working towards the same objective
Employees could also take a long time to react to a managerial decision once it has been taken
What are the advantages of a break-even chart
Managers can tell the expected profit or loss at any level of output.
Graph can be redrawn with different variables to show how the profit and loss is impacted. eg: changing the price at which the good is sold and then redrawing
Helps show the margin of safety
What is the margin of safety
why is it important
Amount by which sales exceeds the breakeven point.
its important because the manger knows by how much the sales can fall so that they still make a profit.
