Ch 19 - costs, scale of production, break even analysis

Question 1

formula for total revenue (sales revenue)

Answer 1

units sold x selling price

Question 2

formula for profit

Answer 2

revenue - total cost

Question 3

formula for total cost

Answer 3

fixed cost + variable cost

Question 4

formula for average cost (unit cost)

Answer 4

total cost / total output

Question 5

definition of fixed costs aka overhead costs

Answer 5

costs that don’t vary with output
(produced or sold in the short run) (still need to be paid even if no outputs are sold)

Question 6

examples of fixed costs [5]

Answer 6

-salary
-rent
-transportation
-electricity
-internet

Question 7

definition of variable cost

Answer 7

costs that directly vary with the output produced or sold

Question 8

variable cost examples [5]

Answer 8

-material costs (raw materials)
-food
-toilet paper
-printing/photocopying
-piece-rate labour costs

Question 9

total cost formula using average cost

Answer 9

average cost x output

Question 10

what decisions can be made due to cost data?

Answer 10

-calculating and setting prices (for profit)
-deciding if production needs to be stopped (total cost > total revenue, loss is made but sales might increase in future & fixed costs still need to be paid)
-deciding on best location (priorities on cheaper cost or good location)

Question 11

formula for contribution (profit per unit sold)

Answer 11

selling price - variable cost (price used to make unit)

Question 12

formula for profit

Answer 12

contribution - fixed cost

Question 13

what are the 5 economies of scale?

Answer 13

-purchasing
-marketing
-financial
-managerial
-technical

Question 14

what is purchasing economies

Answer 14

-for large output, large amounts of materials need to be bought
-bulk-buying discounts are given
-reduces unit cost of each item

Question 15

what is marketing economies

Answer 15

-large businesses can afford own delivery vehicles
-marketing labour costs decreases
-larger vehicles = transport costs reduced
-advertising rates don’t increase (less staff than output sold)
-average costs decrease

Question 16

what is financial economies

Answer 16

-easier to get loans as a larger business (can pay back)
-low rate of interest is charged
-average costs decrease

Question 17

what is managerial economies

Answer 17

-large businesses can hire specialist managers (small can’t afford)
-they are more efficient
-business’ costs decrease

Question 18

what is technical economies

Answer 18

-large businesses can buy large machinery (expensive for small)
-large output can be produced and more efficiently (flow production)
-larger vehicles = transport costs decreases
-average costs decrease

Question 19

what are the 3 diseconomies of scale

Answer 19

-poor communication
-low morale (lack of motivation)
-slow decision-making (weak coordination)

Question 20

what is poor communication

Answer 20

-business grows, more departments / managers / employees
-messages might be inaccurate and slow
-lower efficiency
-average costs increases

Question 21

what is low morale (lack of motivation)

Answer 21

-lots of workers that don’t connect with senior managers (alienation)
-workers might feel unimportant and not valued by management
-no close relationships = lack of motivation
-lower efficiency
-average costs increases

Question 22

what is slow decision-making (weak coordination)

Answer 22

-business grows, chain of command gets longer
-communication gets slow so decision making takes time (everyone needs to be consulted with)
-smaller units are made that control themselves
-hard to deliver decisions made in these groups to business and make sure they’re working toward same goal
-higher ups removed from business’ products and markets

Question 23

definition of diseconomies of scale

Answer 23

factors that lead to increase in average costs as a business grows past a certain size

Question 24

definition of economies of scale

Answer 24

factors that lead to reduction in average costs as businesses grow

Question 25

advantages of break-even charts [5]

Answer 25

-can find profit/loss at each level of output
-costs and revenues can be altered and the graph redrawn to see how profit is affected
-helps calculate safety margin (break even point)
-can see impact of changes (if selling price increases, profit increases, break even point decreases, margin of safety increases)
-can identify break even point and margin of safety (MOS larger, BEP smaller is good)

Question 26

advantages of break-even charts [5]

Answer 26

-profit/loss can be found out at each level of output
-profit/loss can be expected / predicted
-impact (profit/loss) of business decisions (changing costs and revenues and selling price and variable cost) can be shown by redrawing the graph
-impact of changes seen (selling price increases, profit increases, break even point decreases, margin of safety increases)
-helps calculate margin of safety (and break even point) (higher/larger the margin, the better. lower/smaller the break even point, the better)

Question 27

disadvantages of break-even charts [5]

Answer 27

-assuming all units being produced are sold (stored in inventories when not all are sold)
-fixed costs are not always fixed (if scale of production changes) (machinery is bought)
-many other aspects of the business need to be analysed (wastage, sale increase)
-assuming costs are drawn with straight lines (might increase/decrease like with bonuses, overtime wages, discounts)
-selling price may not be constant (discounts)

Question 28

formula for break-even level of production

Answer 28

total fixed costs / contribution per unit

Question 29

formula for total variable cost

Answer 29

units sold x variable cost per unit

Question 30

formula for break even point

Answer 30

fixed cost / unit contribution

Question 31

formula for profit using break even graph

Answer 31

margin of safety x unit of contribution

Question 32

definition of break-even charts

Answer 32

graphs that show how costs and revenues change with sales
shows break even point and margin of safety

Question 33

definition of revenue

Answer 33

income during period of time from sales

Question 34

formula for margin of safety

Answer 34

total units sold - break even point