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The 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
Now we can find the average cost per unit by dividing the total cost y the
number of units, N. Then
Average Total cost per unit= Total Cost/n or (is the same) Average Total Cost
per unit= Fixed Cost divided by n units plus variable cost
As 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 the
following figure
WORKED EXAMPLE:
A restaurant serves 200 meals a day at an average price of 20 euros. The
variable cost of each meal is 10 euros and there are fixed costs of running the
restaurant of 1750 euros a day.