Chapter 19 - Costs, Scale Of Production + Break-even Analysis

Question 1

What happens when a business never reaches break-even point

Answer 1

Business will always make a loss

Question 2

Total revenue formula

Answer 2

Quantity sold x price

Question 3

How can break-even level of output be worked out

Answer 3

Graph or calculation

Question 4

Margin of safety

Answer 4

The amount by which sales exceed the BEP

Question 5

Fixed costs
Alt name

Answer 5

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

Question 6

Variable costs

Answer 6

Costs which vary directly with the number of items sold or produced

Question 7

Total costs

Answer 7

Fixed and variable costs combined

Question 8

Average cost per unit

Answer 8

Total cost of production divided by total output put
Unit cost

Question 9

Use of cost data (3)
Explanation of each

Answer 9

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

Question 10

Economies of scale (5)

Answer 10

Purchasing economies
Marketing economies
Financial economies
Managerial economies
Technical economies

Question 11

Diseconomies of scale

Answer 11

Factors that lead to an increase in average costs as a business grows beyond a certain size

Question 12

Diseconomies of scale (3)

Answer 12

Lack of commitment from employees
Weak coordination
Poor communication

Question 13

Purchasing economies

Answer 13

When businesses can get a discount from buying in bulk. Reduces unit cost and gives the big business and advantage.

Question 14

Marketing economies

Answer 14

Large businesses can afford their own vehicles to distribute goods rather than other firms which reduces transport costs.

Question 15

Financial economies

Answer 15

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

Question 16

Managerial economies

Answer 16

Small businesses can’t afford specialist managers which reduces their efficiency. Larger businesses can which increases efficiency and reduces average costs

Question 17

Technical economies

Answer 17

Specialist machines increase output whilst decreasing workers needed and therefore wage costs. Small businesses cannot afford nor justify buying such machinery

Question 18

Diseconomies of scale: Poor communication

Answer 18

The larger, the more difficult it is to send and receive accurate messages

Question 19

Diseconomies of scale : lack of commitment from employees

Answer 19

Workers may feel they are just a number, small businesses can establish close relationships between workers and top-level management.

Question 20

Diseconomies of scale: Weak coordination

Answer 20

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.

Question 21

Break-even level of output/break-even point

Answer 21

The quantity that must be produced/sold for total revenue to equal total costs

Question 22

Break-even charts

Answer 22

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

Question 23

Revenue

Answer 23

Income during a period of time from the sale of goods/services

Question 24

Advantages of break-even charts (3)

Answer 24

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

Question 25

Limitations of break-even charts (4)

Answer 25

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)

Question 26

Contribution

Answer 26

Selling price less the variable cost

Question 27

Break even level of production formula

Answer 27

Total fixed costs/contribution per unit