Chapter 19 - Costs, Scale Of Production + Break-even Analysis Flashcards
What happens when a business never reaches break-even point
Business will always make a loss
Total revenue formula
Quantity sold x price
How can break-even level of output be worked out
Graph or calculation
Margin of safety
The amount by which sales exceed the BEP
Fixed costs
Alt name
Costs which do not vary in the short run with the number of items sold or produced. Have to be payed whether the business is making sales or not
Overhead costs
Variable costs
Costs which vary directly with the number of items sold or produced
Total costs
Fixed and variable costs combined
Average cost per unit
Total cost of production divided by total output put
Unit cost
Use of cost data (3)
Explanation of each
Selling prices - to make sure the business doesn’t make a loss on each unit sold
Deciding whether to stop/continue production - business can decide based on when the product was launched and if fixed costs still must be paid
Deciding on the best location - why choose a cheap spot if it’s in the worst part of town
Economies of scale (5)
Purchasing economies
Marketing economies
Financial economies
Managerial economies
Technical economies
Diseconomies of scale
Factors that lead to an increase in average costs as a business grows beyond a certain size
Diseconomies of scale (3)
Lack of commitment from employees
Weak coordination
Poor communication
Purchasing economies
When businesses can get a discount from buying in bulk. Reduces unit cost and gives the big business and advantage.
Marketing economies
Large businesses can afford their own vehicles to distribute goods rather than other firms which reduces transport costs.
Financial economies
Larger businesses can raise large sums of capital cheaper than small businesses as banks consider loaning to smaller businesses less risky and charge a lower interest rate
Managerial economies
Small businesses can’t afford specialist managers which reduces their efficiency. Larger businesses can which increases efficiency and reduces average costs
Technical economies
Specialist machines increase output whilst decreasing workers needed and therefore wage costs. Small businesses cannot afford nor justify buying such machinery
Diseconomies of scale: Poor communication
The larger, the more difficult it is to send and receive accurate messages
Diseconomies of scale : lack of commitment from employees
Workers may feel they are just a number, small businesses can establish close relationships between workers and top-level management.
Diseconomies of scale: Weak coordination
It takes longer for decisions made by managers to reach the rest of the business. Managers become too removed from the products and the market the business operates in.
Break-even level of output/break-even point
The quantity that must be produced/sold for total revenue to equal total costs
Break-even charts
Graphs which show how costs and revenues of a business change with sales by showing the level of sales the business must make in order to break in
Revenue
Income during a period of time from the sale of goods/services
Advantages of break-even charts (3)
Managers can read off the expected profit/loss to be made at any level of output
Impact on profit/loss of certain business decisions can be shown by redrawing the graph
Can be used to show the margin of safety
Limitations of break-even charts (4)
Graph does not show the possibility that inventories may build up if not all goods are sold
Fixed costs only remain constant if the scale of production does
They only concentrate on break-even level of production and ignore other important business operations
Costs and revenues can’t always be drawn with straight lines (affected by overtime wages and discounts)
Contribution
Selling price less the variable cost
Break even level of production formula
Total fixed costs/contribution per unit
