Unit 4: Chapter 19 Flashcards
Costs, scale of production and break-even analysis
What are fixed costs?
a cost that is the same and not affected by output
they must be paid no matter the sales of the month (rent, salaries etc)
What are variable costs?
costs that change depending on the output/demand
raw materials
What are startup costs?
costs you must pay at the start (investments)
What is the formula for total costs?
fixed cost + (total variable costs x quantity)
What is the formula for average cost?
total cost of production / output
What are economies of scale?
the factors that lead to a reduction in the average costs as a business increases in size
What are the 5 economies of scale?
purchasing economies, marketing economies, financial economies, managerial economies, technical economies
What are purchasing economies?
as a business grows they have enough cash flow to buy in bulk, giving them discounts which reduce the unit cost of a product
What are marketing economies?
as a business grows they can invest in more advertisement that increases brand awareness overall increasing sales
What are financial economies?
because large businesses raise capital cheaper banks are more likely to give loans + lower interest because they are more safe to pay the money back
What are managerial economies?
bigger companies can afford to pay for specialists and higher skilled workers which increases efficiency
What are technical economies?
flow production methods can be implemented as larger companies can afford the startup costs, which can increase efficiency
What are diseconomies of scale?
the factors that lead to the increase in average costs as a business grows beyond curtain size
What are the 3 diseconomies of scale?
poor communication, lack of commitment from employees, weak coordination
What is the break even level of output?
the quantity that must be produced/sold for total revenue to equal total costs. so that the business doesn’t make a loss.
What is total revenue?
total amount of money received from selling goods
What is the formula for total revenue?
price of product x quantity sold
What are total costs?
fixed costs added to all variable costs of production
What is the break even point?
the intersection on a graph where the total revenue and total cost meet
What is the formula for break even?
fixed cost / contribution
What is the formula for contribution per unit?
selling price - variable costs
Would we want the break even number to be low or high, why?
the lower the number is the better, so you can break even faster and make more profit
in order to do this you can increase the selling price or reduce the variable costs
What is the margin of safety?
how much quantity you think you will sell
What is the formula for margin of safety?
estimated sales - break even point
Would we want the margin of safety number to be low or high, why?
the higher the better because this means we make more profit
Whats the relationship between break even and margin of safety?
as the break even decreases the margin of safety increases
