4.2 Costs, scale of production and break-even analysis Flashcards
Fixed costs
Costs that do not change with output
Variable costs
Costs that change in direct proportion to output
Total cost
All the variable and fixed costs of producing the total output
= variable costs + fixed costs
What are the uses of cost data?
Setting prices
Deciding whether to stop production
Deciding on the best location
Economies of scale
Factors that lead to a reduction in average costs as a business increases in size
Financial
Lenders such as banks often prefer to lend to large businesses because they consider them less of a risk than smaller businesses
Managerial
As a business grows, it often employs specialist managers for the different functional area, which improves the quality of business decisions and make fewer mistakes
Marketing
Average costs of marketing falls as output and sales increase
Purchasing
Large businesses usually buy greater quantities of raw materials. Suppliers often offer discounts on large or bulk purchases
Technical
Technology enables businesses to produce very high levels of output at lower unit costs
Diseconomies of scale
Factors that cause average costs to rise as the scale of operations increases
Factors of diseconomies of scale
Poor communication
Demotivation of workers
Poor Control
Alienation of staff
Slow decision making
Break-even
level of output where revenue equals total costs; business is making neither profit nor loss.
Breakeven analysis
shows the relationship between revenue, costs and volume of output/sales.
Use of breakeven analysis
Calculate how many units it needs to sell before it starts to make a profit
Calculate effect on profit of increasing or decreasing the price of a product
Calculate effect on profits of an increase or decrease in business costs
