High Quality
Open the downloaded document, and select print from the file menu (PDF reader required).
Economies of scale:the break point analysis
By J.M. P_U_E_R_T_A_S, LecturerThe
break point analysis
shows one reason why organizations can get
ECONOMIES OF SCALE,
where the average unit cost falls as the number of units sold increases. We know that
TOTAL COST= FIXED COST +VARIABLE COST × N
(WHERE N IS THE NUMBER OF UNITS PRODUCED)
Now we can find the average cost per unit by dividing the total cost y thenumber of units, N. ThenAverage Total cost per unit= Total Cost/n or (is the same) Average Total Costper unit= Fixed Cost divided by n units plus variable costAs n increases, the average cost per unit will fall because the proportion of
fixed cost to be recovered by each unit sold is reduced, as shown in thefollowing figure
WORKED EXAMPLE:
A restaurant serves 200 meals a day at an average price of 20 euros. Thevariable cost of each meal is 10 euros and there are fixed costs of running therestaurant of 1750 euros a day.a)What profit is made by the restaurant?b)What is the average total cost of a meal?c)By how much would the average cost of a meal fall if the numberserved rose to 250 euros a day?
Add a Comment