chapter 19 Flashcards
why would a business calculate cost
1.help manager set a price
2.decide wether to stop production
3.to calculate profit/loss
types of costs
1.fixed costs
2.variable costs
what are fixed costs
does not change with number of items sold or produced
what is variable cost
changes directly with number of items sold or produced
how to calculate total cost
1)fixed cost+variable cost
2)average cost per unit x output
how to calculate average cost per unit
total cost of production/total output
how to calculate break even
fixed costs/selling price-variable cost
what is break even level of output
quantity that must be sold for total revenue=total cost
how to decrease break even point
1)increase selling price
2)decrease variable cost
define revenue
1)selling price x number of output
2)the amount a business earns from the sale of it’s products.
how to calculate total variable cost
variable cost x no. of units
advantages of break even charts
1.can show the impact of some business decisions by redrawing the graph
2.managers are able to know the expected profit or loss at any level of output and at any time of the year
3.shows the margin of safety, useful indication of how much sales could fall without the firm facing a loss
4.can help choose a new location
how to calculate margin of safety
actual sales-break even point
the amount by which sales exceed the bep
how to draw break even chart
1.choose 3 number of units
2.draw a line parallel to X axis this is the fixed cost
3.calculate total variable cost
4.calculate total costs
5.calculate total revenue
6.draw on graph
7.break even point is the point of intersection between total revenue and total cost
disadvantages of break even chart
1.based on assumption that all products will be sold
2.assuming that fixed costs will always be constant
3.concentrates on production only, doesn’t take wastage into consideration
5 types of economies of scale
1)purchasing economies
2)marketing economies
3)financial economies
4)managerial economies
5)technical economies
what is purchasing economies
when a business guys large number of materials, discount for buying in bulk, reduce average cost per unit
how to achieve marketing economies
1)ability to afford own vehicles and distribute own goods
2)better advertising rates
3)will not need twice as many sales staff
what is financial economy and why
ability to raise capital more cheaply
why?
1)banks find them less risky
2)banks find larger businesses more profitable as they borrow large amount of money so total interest is higher
what is managerial economies
ability to pay for specialist managers, increase efficiency, reduce average cost
what is technical economies
ability to invest in flow production methods and latest technology, reduce average cost per unit
what is economies of scale
factors that lead to a decrease in average cost per unit as a business increase in size
what is diseconomies of scale
factors that lead to increase in average cost per unit as a business grows beyond a certain size
what makes diseconomies of scale occur
1.poor communication
2.lack of commitment from employees
3.weak coordination
