Lecture 4 Flashcards
What are the types of costs when the objective is decision making?
Variable/Fixed costs
Opportunity costs
Sunk costs
Marginal/Incremental/Decremental costs
What are variable costs?
Costs that vary based on the production volume. More production leads to more costs.
What are fixed costs?
Costs that are independent of the production volume. This is relatively stable although it can change.
What are other variations of the variable/fixed cost?
Semi-variable: stable to up
Semi-fixed: stable to higher level stable
What are opportunity costs?
Potential benefits a business/investor.individual misses out one when choosing one alternative over the other. Every decision has a trade off.
What are sunk costs?
Costs that have already been incurred by past actions, so they cannot be recovered. An example is a failed line from money invested in R&D.
What is loss aversion?
Impact of losses feels much worse to us than impact of gains, so we are more likely to avoid losses than seek out gains. This is also sunk cost fallacy.
Why should be refrain from the sunk cost fallacy?
Because it leads to making decision the are irrational and lead to suboptimal outcomes. So, we need to be aware of it in order to focus on the present and future costs/benefits instead of the past’s.
What are marginal costs?
Extra costs that a company has when they decide to produce an additional unit of the product they are manufacturing. Marginal costs gradually decreases as production increases.
What are incremental costs?
Total additional cost associated with the decision to add a new variety of products, use a different production method etc., it represents the difference between two alternatives. It is similar to the opportunity costs but this one focusses on the losses instead of benefits.
What are decremental costs?
Total saved cost associated with the decision to add a new variety of products, use a different production method etc. It represents the difference between two alternatives.
What is breakeven point?
Point where revenue is equal to total costs.
What are two ways to express breakeven point?
Breakeven volume: # unit needed to sell
Break even point in monetary units: how much to sell
How to calculate the breakeven point in units?
Breakeven (units) = fixed costs/unit contribution margin
unit contribution margin = unit selling price - unit variable cost
How to calculate the breakeven point in monetary units?
Breakeven = fixed costs/(1-variable/sales))
or
Breakeven (monetary units) = breakeven (units) * selling price
