Unit 19 : Costs, Scale of Production and Break-Even Analysis

Question 1

Define Fixed Costs

Answer 1

costs which don’t vary in the short run according to the number of items sold / produced. they must be paid whether or not the business is making sales.

Question 2

Define Variable Costs

Answer 2

costs which vary directly with the number of items being sold / produced

Question 3

Formula for Variable Costs

Answer 3

variable cost = total cost - fixed cost

Question 4

2 Formulas for Total Cost

Answer 4

1. fixed cost + variable cost
2. average cost per unit x output

Question 5

Formula for Average Cost per Unit

Answer 5

total cost of production divided by total output

Question 6

5 Usages of Cost Data

Answer 6

1. setting prices
2. deciding whether or not to stop production
3. deciding the best location
4. helps managers make decisions
5. needed to calculate profit and loss

Question 7

Define Economies of Scale

Answer 7

the factors that reduce average costs as a business grows

Question 8

Define Purchasing Economies

Answer 8

when a business buys in bulk, it tends to receive discounts, decreasing the price of each good

Question 9

Define Marketing and Selling Economies

Answer 9

when the company advertises for goods, it will pay the same amount to advertise a greater number. therefore, when marketing for a higher output, unit costs fall, decreasing ATC.

Question 10

Define Financial Economies

Answer 10

banks tend to lend to larger companies with low-interest rates, as they borrow high amounts and their collateral value is high

Question 11

Define Managerial Economies

Answer 11

large firms have opportunities to employ specialists who will help reduce wastage and increase efficiency and productivity

Question 12

Define Technical Economies

Answer 12

more capital to invest in newer, more efficient technology and specialist equipment

Question 13

Define Diseconomies of Scale

Answer 13

the factors that lead to an increase in average costs as the business grows beyond a specific size

Question 14

Explain Poor Communication as a DEOS

Answer 14

the larger the organization, the harder it is to communicate

Question 15

Explain Lack of Commitment from Employees as a DEOS

Answer 15

large businesses have many employees, and not everyone is connected to the top management, reducing their motivation levels

Question 16

Explain Slow Decision-Making & Weak Coordination as a DEOS

Answer 16

large businesses have longer chains of command, so information and instructions take longer to reach the desired person, slowing communication and decision-making

Question 17

Define Break-Even Level of Output

Answer 17

the quantity that must be produced/sold for total revenue to equal total costs. (also known as break-even point)

Question 18

Define Break-Even Charts

Answer 18

a graph showing how the costs and revenues of a business change with sales. they show the level of sales the business must make to break even.

Question 19

Define Revenue

Answer 19

the income during a period of time from sales of goods

Question 20

Define Break-Even Point

Answer 20

the level of sale at which total costs = total revenue. the point where they intersect in the graph

Question 21

Break-Even Formula

Answer 21

total fixed costs divided by contribution per unit

Question 22

Contribution per Unit Formula

Answer 22

selling price - variable cost

Question 23

3 Benefits of Break-Even Charts

Answer 23

1. managers can use it to check if they should expect profits or losses
2. it lets managers try out different possibilities to see what works
3. it shows the safety margin which is the number of sales that exceeds the break-even point.

Question 24

Formula for Margin of Safety

Answer 24

total units of production - break even quantity

Question 25

4 Limitations of Break-Even Charts

Answer 25

1. assumes that all products made will be sold
2. fixed costs only stay the same if scale of production stays the same
3. assumes that costs and revenues can be drawn with a straight line which is unrealistic
4. assumes costs and revenue increase at a constant rate