Costs,Scale of production and break even analysis 4.2 Flashcards
What are fixed costs
Costs that do not vary
Costs that have to be paid whether the business is making sales or not
What are variable costs
Costs which vary directly with the number of items sold or produced
What is average cost
Total cost of production divided by total output
What is the total cost
Fixed and variable cost combined
How to use setting price as part of the cost data
The business will need to know the average cost per unit so the business will know the charging price.
If they don’t it can lead to a loss of money
How to decide on best location using cost data
There might not be a point in choosing low cost locations if it is in the worst part of the town
What are economies of scale
Factors that lead to reduction in average costs as business size increases
How does purchasing economies affect economies of scale
When businesses by materials they are able to gain discount buying in bulk
This reduces unit cost and gives advantage over smaller businesses who buy in small quanitities
How does marketing economies affect economies of scale
Large businesses can buy larger vehicles to decrease transport costs
How does financial economies affect economies of scale
Large business able to raise capital(money) more cheaply than small ones
Banks consider lending to larger businesses safer therefore lower interest rate
How does managerial economies affect economies of scale
Small businesses usually cannot afford specialist managers
This will reduce efficiency
Large businesses can afford and increase efficiency and decrease average cost
What are diseconomies of scale
Factors that increase average costs as business grows beyond certain size
How does poor communication affect diseconomies of scale
Larger the business harder to send and receive accurate messages.
If slow and inaccurate messages are sent more mistakes occur leading to efficiency and higher average costs
How does lack of commitment from employees affect diseconomies of scale
Large businesses employee thousands of workers
They may never see top managers of the business
This may seem that workers are not valued by management
decrease efficiency increasing average cost
How does weak coordination affect diseconomies of scale
Longer for decisions to be made by managers to reach different groups of workers in a large business
More difficult to coordinate the work and work towards same objective
