Costs, scale of production and break-even analysis Flashcards
Fixed costs
are costs which do not vary in the short run with the number of items sold or produced. They have to be paid whether the business is making any sales or not. They are also known as overhead costs.
Variable Costs
are costs which vary directly with the number of items sold or produced.
Total costs
are fixed and variable costs combined
Average cost per unit
is the total cost of production divided by total output (sometimes referred to as ‘unit cost’
Average cost of production
Average cost of production = Total costs of production/total output
Economies of scale
are the factors that lead to a reduction in average costs as a business increases in size
The 5 economies of scale
- Purchasing (Bulk-buying discounts)
- Marketing economies (Transport Advertising)
- Financial economies (Lower interest rates)
- Managerial economies (Specialist in all departments)
- Technical economies (Specialists in latest equipment)
Diseconomies of scale
are the factors that lead to an increase in average costs as a business grows beyond a certain size
The 3 diseconomies of scale
- Poor communication
- Lack of commitment from employees
- weak coordination
Break-even level of output
is the quantity that must be produced/sold for total revenue to equal total costs (break-even point)
Break-even charts
are graphs which show how costs and revenues of a business change with sales. They show the level of sales the business must make in order to break even.
Revenue
is the income during a period of time from the sale of goods or service.
Revenue formula
Total revenue = quantity sold x price
Advantages of break even charts
- Managers able to read off the expected profits or losses from the graphs
- helps when making decisions such as what will happen if they increase the price of a cetain product
Margin of safety
is the amount by which sales exceed the break-even point
