chapter 19

Question 1

why would a business calculate cost

Answer 1

1.help manager set a price
2.decide wether to stop production
3.to calculate profit/loss

Question 2

types of costs

Answer 2

1.fixed costs
2.variable costs

Question 3

what are fixed costs

Answer 3

does not change with number of items sold or produced

Question 4

what is variable cost

Answer 4

changes directly with number of items sold or produced

Question 5

how to calculate total cost

Answer 5

1)fixed cost+variable cost
2)average cost per unit x output

Question 6

how to calculate average cost per unit

Answer 6

total cost of production/total output

Question 7

how to calculate break even

Answer 7

fixed costs/selling price-variable cost

Question 8

what is break even level of output

Answer 8

quantity that must be sold for total revenue=total cost

Question 9

how to decrease break even point

Answer 9

1)increase selling price
2)decrease variable cost

Question 10

define revenue

Answer 10

1)selling price x number of output
2)the amount a business earns from the sale of it’s products.

Question 11

how to calculate total variable cost

Answer 11

variable cost x no. of units

Question 12

advantages of break even charts

Answer 12

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

Question 13

how to calculate margin of safety

Answer 13

actual sales-break even point
the amount by which sales exceed the bep

Question 14

how to draw break even chart

Answer 14

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

Question 15

disadvantages of break even chart

Answer 15

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

Question 16

5 types of economies of scale

Answer 16

1)purchasing economies
2)marketing economies
3)financial economies
4)managerial economies
5)technical economies

Question 17

what is purchasing economies

Answer 17

when a business guys large number of materials, discount for buying in bulk, reduce average cost per unit

Question 18

how to achieve marketing economies

Answer 18

1)ability to afford own vehicles and distribute own goods
2)better advertising rates
3)will not need twice as many sales staff

Question 19

what is financial economy and why

Answer 19

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

Question 20

what is managerial economies

Answer 20

ability to pay for specialist managers, increase efficiency, reduce average cost

Question 21

what is technical economies

Answer 21

ability to invest in flow production methods and latest technology, reduce average cost per unit

Question 22

what is economies of scale

Answer 22

factors that lead to a decrease in average cost per unit as a business increase in size

Question 23

what is diseconomies of scale

Answer 23

factors that lead to increase in average cost per unit as a business grows beyond a certain size

Question 24

what makes diseconomies of scale occur

Answer 24

1.poor communication
2.lack of commitment from employees
3.weak coordination