Cost Scale of Production and Break Even Analysis Flashcards
Types of business costs
Fixed costs - cost that have to be paid whether the business is making sales or and do not vary with the number of items made eg: rent
Variable costs - costs that which vary with the number of items made eg: raw materials
Total costs - the fixed costs and the total costs combined
Economies of scales definition
Factors that lead to lower average costs as a business increases in size
Diseconomies of scale definition
Factors that lead to disadvantages as a business increases in size
Examples of economies of scales
Purchasing economies (Buying in bulk)
Financial economies, (easier to access to finance)
Managerial economies (High quality managers)
Technical economies (Machinery automation)
Marketing economies (marketing cost less)
Examples of diseconomies of scale
Unmotivated workforces
Ineffective communication
Weak co-ordination through layers of decision making
Break even output
The quantity that must be sold for total revenue to equal the total costs
Break even charts
Graphs to show how revenue and costs change with sales, shows how many sales is needed for revenue to equal total costs (this is called to break even point)
Y axis - measures the money amounts (cost and revenue)
X axis - the number of units sold
Fixed costs is always a straight line as they do not vary
Total cost starts at the fixed cost line and is diagonal because the variable costs vary
Margin of safety definition and equation
The amount of sales that exceed to break even point
Current sales - break even point = margin of safety
Revenue definition and equation
The businesses income from sales during a period of time
Total revenue = quantity sold x price
Advantages and disadvantages of a break even chart
Easy to plan and predict the future and how we can grow from this
Can redraw multiple scenarios and analyse which one is the best
Can show the margin of safety
Break even charts are produced to assume that all products made are sold (not always the case)
Fixed cost only remain the same if the scale of production does not change (it might)
Break even charts only shows break even point there are many other aspects that impact a business
Break even formula
Total fixed costs / contribution per unit
(Remember the unit is units sold eg: 200 units sold)
Contribution formula
Selling price - variable costs
Using cost data to make decisions
- selling prices, needs to cover costs
- is it worth it?, deciding whether to stop production or continue
- ## deciding on the best location
