Lesson 18 - Costs, scale of production and break even analysis

Question 1

What are the two types of costs and examples of them

Answer 1

1. Fixed costs - management salaries - rent of properties

2. Variable costs - Material costs

Question 2

Define Fixed and Variable costs

Answer 2

• Fixed costs : are costs that do not vary with output

- Variable costs : are costs which vary directly with output

Question 3

What is the total costs formula

Answer 3

Total costs = Fixed costs + Variable costs

Question 4

What is the Average cost formula

Answer 4

Average cost = Total costs / total output

Question 5

Give 3 uses of costs data

Answer 5

1. Setting prices - If the average cost per unit was not known the business could charge a price which leads to a loss on every item being sold
2. Deciding whether to stop production or not
3. Deciding the best location

Question 6

Define economies of scale

Answer 6

Economies of scale are the factors that result in a decrease in average costs as the business grows.

Question 7

What are the 5 economies of scale

Answer 7

• Purchasing : Big businesses get discounts when buying in bulk
• Managerial : Big buisnesses can afford specialist maangers
• Marketing : targeting a larger audience, business can advertise its own products rather than having another company doing it for them.
• Financial : Bigger businesses get loans with lower interest rates from banks since they are a less risk.
• Technical : Bigger businesses can afford to buy big machines to do work with less staff.

Question 8

Define Diseconomies of scale

Answer 8

Diseconomies of scale are the factors that result in as increase in average costs as the business grows above a certain point.

Question 9

What are the 3 Diseconomies of scale.

Answer 9

• Poor communication : In bigger businesses its hard to send and transfer messages.
• Low morale : Bigger businesses employ many people and because of that lots of employees feel unimportant because they cant grow.
• Slow decision making: Bigger businesses take longer to make decisions to satisfy all of the audience

Question 10

Define Break-even level of output

Answer 10

Break-even level of output is the quantity that should be produced for total costs to equal total revenue.

Question 11

Drawing of BE chart

Answer 11

What we need :Total costs fixed costs - Variable costs -revenue
x axis shows number of units
y axis shows costs and revenu

Question 12

What is the revenue formula

Answer 12

Revenue = Quantity sold * price per unit

Question 13

Define Break-even point

Answer 13

The Break-even point is the level of sales at which total costs = total revenue

Question 14

List 3 Advantages of break-even charts

Answer 14

1. Managers can read the graph and tell if the company expects profit or loss
2. It lets managers try out different possibilities
3. It can be used to show the safety margin - the amount by which sales exceed the break even point

Question 15

List 2 Disadvantages of break-even charts

Answer 15

1. BE are constructed assuming all produced goods are sold.

2. Fixed costs only remain constant if scale of production doesn’t change.

Question 16

What is the contribution formula and BE formula

Answer 16

Contribution = Selling price - Variable costs

BE formula = TFC / Contrib