UNIT 4 - Chap 19: Cost, scale of production and break-even analysis Flashcards
What is the definition for Fixed cost?
Are the costs which do not vary in the short run with a number of items sold or produced. They have to be paid whether the business is making sales or not. They also known as overhead costs
What is the definition for Variable cost?
Are the costs which very directly with the number of items sold or produced.
What is the formula for Total cost?
Fixed cost + variable cost = total cost.
What is the formula of the average cost per unit?
Total cost of production ÷ by total output (sometimes referred to as unit cost) = average cost per unit
What is the definition of the
Economics of scale?
Are the factors that lead to the British and an average cost as a business increases in size.
What is the definition for Diseconomies of scale?
Are the factors that lead to an increase in average cost as the business grows beyond a certain point.
What is the definition of the Break–even level of output?
Is the quantity that must be sold/produced for total revenue to equal total cost (also known as the breakeven point).
What is the definition of the Break-even charts?
All the crossword show how costs and revenues of a business changes with sales. They showed the level of sales business must make an order to break even.
What is the definition of the and the formula Revenue?
Revenue of a business is that income during a period of time from the sale of goods or services.
Quantity sold x price = Total revenue
What is the definition of the Margin of safety?
Is the amount by which sales exceed the breakeven point.
Profit?
Total revenue - total cost = profit
Break-even formula
Fixed cost ÷ by contribution per unit (selling price - variable cost per unit)
Margin of safety formula?
actual sales volume
What are the 2 benefits of break-even analysis? (2)
- Managers can read off the Graph how much profit/loss the business has made at any level of output
- Allows the business to see the impact on the Breakeven Point if the business decides to increase the Selling price /decrease Variable Costs
What are the 2 drawbacks of break-even analysis? (2)
- Breakeven calculations may be inaccurate if the selling price changes over time. E.g. at times the business might have to reduce their selling price to attract customers causing the calculation/BEP to be inaccurate.
- Assumes the fixed costs never change with output. However, eventually they will increase if the business has to move to a bigger factory as rent costs will increase
What are the 5 types of economies of scale?
- Purchasing
- Financial
- Marketing
- Technical
- Managerial
Describe the economy of scale purchasing?
When a business grows they need to buy more raw materials/stock. If they are now buying large amounts of raw materials in bulk they can negoitate discounts from suppliers. This reduces average costs
Describe the economy of scale financial?
Banks often consider larger firms to be less risky than smaller ones and so a lower rate of interest is often charged on bank loans. Reducing fixed costs and therefore Average costs
Describe the economy of scale marketing?
A businesses’ advertising costs (a fixed cost) will be spread over more units as the business increases in size and sells more units. E.g. If advertising is $100,000 and they sell 100,000 products, advertising costs are $1 per unit. If they sell 2000 products their advertising costs are only $0.5 dollars per unit. Therefore average costs are lower as the business increases in size.
Describe the economy of scale technical?
Larger firms can afford specialist machinery and so are more efficient and therefore average costs will be lower
Describe the economy of scale managerial?
Large firms can afford specialist managers e.g. human resource manager/operations manager. Specialist managers tend to be more efficient, therefore reducing average costs
What are economies of scale?
The factors that lead to the reduction of average costs as a business increases in size
What are diseconomies of scale?
What are the 3 diseconomies of scale? (3)
- Poor communication
- Lack of commitment from employees
- Weak coordination
Describe the diseconomy of scale poor communication?
The larger the business the harder it is to communicate between staff. This could lead to mistakes and cause inefficiencies and therefore higher average costs
Describe the diseconomy of scale lack of commitment from employees?
In a large firm, employees may feel alienated and not valued as there is so many workers. This can lead to demotivation and therefore inefficiency.
Describe the diseconomy of scale weak coordination?
It is difficult to coordinate a large business as so many employees to control. This could lead to employees not being coordinated and monitored fully which could lead to inefficiencies and therefore higher average costs.
