Ch 19 - costs, scale of production, break even analysis Flashcards
formula for total revenue (sales revenue)
units sold x selling price
formula for profit
revenue - total cost
formula for total cost
fixed cost + variable cost
formula for average cost (unit cost)
total cost / total output
definition of fixed costs aka overhead costs
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)
examples of fixed costs [5]
-salary
-rent
-transportation
-electricity
-internet
definition of variable cost
costs that directly vary with the output produced or sold
variable cost examples [5]
-material costs (raw materials)
-food
-toilet paper
-printing/photocopying
-piece-rate labour costs
total cost formula using average cost
average cost x output
what decisions can be made due to cost data?
-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)
formula for contribution (profit per unit sold)
selling price - variable cost (price used to make unit)
formula for profit
contribution - fixed cost
what are the 5 economies of scale?
-purchasing
-marketing
-financial
-managerial
-technical
what is purchasing economies
-for large output, large amounts of materials need to be bought
-bulk-buying discounts are given
-reduces unit cost of each item
what is marketing economies
-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
what is financial economies
-easier to get loans as a larger business (can pay back)
-low rate of interest is charged
-average costs decrease
what is managerial economies
-large businesses can hire specialist managers (small can’t afford)
-they are more efficient
-business’ costs decrease
what is technical economies
-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
what are the 3 diseconomies of scale
-poor communication
-low morale (lack of motivation)
-slow decision-making (weak coordination)
what is poor communication
-business grows, more departments / managers / employees
-messages might be inaccurate and slow
-lower efficiency
-average costs increases
what is low morale (lack of motivation)
-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
what is slow decision-making (weak coordination)
-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
definition of diseconomies of scale
factors that lead to increase in average costs as a business grows past a certain size
definition of economies of scale
factors that lead to reduction in average costs as businesses grow
advantages of break-even charts [5]
-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)
advantages of break-even charts [5]
-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)
disadvantages of break-even charts [5]
-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)
formula for break-even level of production
total fixed costs / contribution per unit
formula for total variable cost
units sold x variable cost per unit
formula for break even point
fixed cost / unit contribution
formula for profit using break even graph
margin of safety x unit of contribution
definition of break-even charts
graphs that show how costs and revenues change with sales
shows break even point and margin of safety
definition of revenue
income during period of time from sales
formula for margin of safety
total units sold - break even point
