BUISSINES STUDIES:

CHAPTER 19: Costs, scale of production and break even analysis

ALL business activity involves some kind of cost

-costs are lower than revenue-> profit

Fixed costs- stay the same regardless of the amount of output.

Eg. Fulltime salaries/rent

Variable costs- vary with the amount of goods produced

eg. Material costs/ part time salaries

Total cost of production= fixed + variable costs

Average costs of production- total cost of production

(unit cost) total output

Total cost = average cost per unit x output

Using cost data

- Setting prices
- Deciding whether to stop production
- Chosing the best location

Economies of Scale

- Factors that lead to reduction in average costs that are achieved by business
growth

Diseconomies of scale

Economies of scale

Types of Economies of Scale

-Purchasing economies = discounts on bulk orders

-Marketing = larger businesses afford their own vehicles, increase of sales stuff
won’t increase in the same proportion as product lines = reduced average costs
 -Financial = larger businesses can borrow larger amounts of money from the
bank with lower interest
-Managerial = larger businesses can afford specialist managers in all
departments which increases efficiency
-Technical = Larger businesses can afford better equipment+ flow production
which increases the output

Diseconomies of scale
Some businesses become inefficient as they become larger
- Increase of businesses average costs as it grows

Reasons:
-large organisation + poor communication, longer to make deals, mistakes
- lack of commitment and efficiency = large companies hire thousands of workers
and not being able to see their employers may make workers feel unappreciated
/ unmotivated
- weak coordination = it takes longer for decisions of managers to reach all parts
of a business, makes it harder to work towards objectives effectively

Break even charts

-breakeven level of output =minimum level of output that must be sold to cover
total costs
Breakeven point= total costs and total revenue cross ( above = profit, below +
loss)
Revenue- income during a period of time (total revenue = quantity sold sold
price)

Advantages:
- Expected profit loss
- Impact of business decisions (redrawing graph)
- Margin of safety (amount by which sales exceed break even point)

Limitations:

- Assumes all goods produced are sold

- Other aspects besides break even point
- Assumes that costs and revenues are constant and can be represented by a
straight line

Break even point calculation =

Selling price – variable cost = contribution

Total fixed costs/contribution per unit