Chapter 19: Costs, scale of production and break-even analysis Flashcards
Why do managers have to worry about cost?
- To compare cost with revenue to calculate whether or not a profit is made.
- To compare costs of locations, to aid decision making process.
- To decide the price to charge customers.
What are fixed costs?
Costs that do not vary with the number of items of output produced (in the short run). They have to be paid, regardless the sales or production. Also known as overhead costs.
What are variable costs?
Are costs which vary directly with the number of goods produced or sold.
Identify some examples of fixed costs.
- Management salaries
- Rent for property.
Identify some examples of variable costs.
- Material costs.
- Piece-rate labor cost
Define total costs.
They are fixed and variable costs combined.
Define Average costs.
Total costs divided by b=number of units sold/produced; also called cost per unit.
How is total costs calculated.
Total costs of production =fixed costs + Variable costs
How is the average cost of production calculated?
Total cost of production (in a time period)/ Total output (in a time period)
How can total cost be calculated if average cost of production and the level of output is known.
Total cost= average cost per unit x output.
How can cost data be used?
- Setting prices.
- Deciding whether to stop production or continue.
- Deciding on the location.
Explain why average cost is needed to set prices.
- If it is not know, the business could charge a price that leads to a loss.
- They could even charge unrealistic prices for customers which means less sales.
Explain why average cost is needed to deciding whether to stop production or continue.
- No business wants to continue to make a loss.
- However factors like just launching a product and fixed costs have to be considered.
