Chapter-16 Flashcards
Costs, scale of production and break even analysis
What are fixed costs?
Costs that do not change with output.
What are variable costs?
Costs that change in direct proportion to output.
What is total cost?
All the variable and fixed costs of producing the total output.
What are average costs?
The cost of producing a single unit of output.
What are economies of scale?
The reduction in average costs as a result of increasing the scale of operations.
What are the different types of economies of scale?
1) Financial economies – Large businesses get loans at lower interest rates.
2) Managerial economies – Specialist managers improve efficiency and decision-making.
3) Marketing economies – Marketing costs increase slower than sales, reducing average cost.
4) Purchasing economies – Bulk buying leads to supplier discounts.
5) Technical economies – Advanced technology lowers unit costs for large-scale production.
What are diseconomies of scale?
Diseconomies of scale are factors that cause average costs to rise as a business expands.
What are some causes of diseconomies of scale?
1) Poor communication – Leads to slow decision-making and mistakes.
2) Demotivation of workers – Reduces productivity and increases labour turnover.
3) Poor control – Difficult to coordinate departments and production units.
What is break-even?
Break-even is the level of output where revenue equals total costs, meaning the business makes neither profit nor loss.
How can a business use break-even analysis?
1) Calculate how many units it needs to sell before making a profit.
2) Determine the effect of price changes on profit.
3) Assess the impact of cost changes on profit.
What does a business need to know to produce a break-even chart?
1) Revenue at zero output and at its maximum output (capacity).
2) Total costs at zero output and at capacity output.
3) Fixed costs at zero output and at capacity output.
What are the limitations of break-even charts?
1) Assume that all costs and revenues can be represented by straight lines.
2) It is not easy to separate costs into fixed and variable.
3) Assume that all output is sold, without accounting for inventories and the costs of holding them
What are the benefits of break-even charts?
1) Easy to construct and interpret.
2) Provide businesses with useful information about the output that must be sold to cover all costs and how different sales volumes affect the margin of safety and profitability.
3) Can show the effect of a decision to change costs or revenues.
4) Can help with other important business decisions such as the location and relocation of a business.
