Unit 4: Cost, scale of production and break-even analysis (Chap 16)

Question 1

What are the 4 main classifications of costs?

Answer 1

• Fixed costs
• Variable costs
• Total costs
• Average costs

Question 2

What are examples of fixed costs (they don’t change with output)?

Answer 2

• Factory rent
• Salary of managers

Question 3

How can a business use cost data?

Answer 3

• Setting prices
• Break-even analysis
• Decisions about whether to continue or stop producing a product

Question 3

What is an example of a variable cost (changes with output)?

Answer 3

Raw materials e.g. if output increases by 50%, then the variable costs will also increase by 50%

Question 4

What are 5 types of economies of scale?

Answer 4

• Financial economies
• Managerial economies
• Marketing economies
• Purchasing economies
• Technical economies

Question 5

Notes on financial economies

Answer 5

• Lenders, such as banks, prefer to lend to large businesses because they consider them less of a risk than smaller businesses
• Therefore, large businesses find it easier to borrow money
• They often do so at a lower rate of interest than smaller businesses

Question 6

Notes on managerial economies

Answer 6

• As a business grows, it often employs specialist managers for the adherent functional ares of the business such as marketing or operations
• Specialist managers improve quality and make fewer mistakes than non-specialist managers

Question 7

Notes on marketing economies

Answer 7

• While total marketing costs rise as a business gets larger, they don’t rise at the same rate as sales output
• So, if a business doubles its output and sales, it will not need to double its marketing costs
• The average cost of marketing falls as output and sales increase

Question 8

Notes on purchasing economies

Answer 8

• Large businesses usually buy greater quantities of raw materials and goods than smaller businesses
• Suppliers often offer discounts on large, or bulk, purchases
• Small businesses don’t benefit from these discounts (as they buy smaller quantities)

Question 9

Notes on technical economies

Answer 9

• Large businesses usually use flow production to produce their output which often uses the latest technology
• May be very expensive and only very large businesses can afford the level of investment required
• Allows businesses to produce very high levels of output at lower unit costs than smaller businesses

Question 10

What are 3 diseconomies of scale?

Answer 10

• Poor communication
• Lack of commitment from employees
• Weak coordination

Question 11

Notes on poor communication

Question 12

Notes on lack of commitment from employees

Question 13

Notes on weak coordination