4.2 Cots, Break even scale of produ

Fixed costs

costs that do not change with output

Variable costs

costs that change in direct proportion to output

Total cost

variable and fixed costs combined of producing the total output

Average costs

Total costs/total output

Profit

Revenue - total costs

Fixed or Variable: factory rent

Fixed

Fixed or Variable: Leather used in making shoes

Variable

Fixed or Variable: Electricity used in powering machinery

variable

Fixed or Variable: Machinery maintenance

Fixed

Fixed or Variable: Advertising

Fixed

Fixed or Variable: Production workers' wages

Variable

Fixed or Variable: Factory managers' salaries

Fixed

Fixed or Variable: Carriage outwards of goods to customers

Fixed

Fixed or Variable: Safety equipment of production workers

Fixed

Define economies of scale

the reduction in average costs as a result of increasing the scale of operations

Types of economies of scale:

1. Financial economies
2. Managerial economies
3. Marketing economies
4. Purchasing economies
5. Technical economies

Financial economies

Larges businesses are easier to borrow loans at a lower rate of interest than small businesses.

Managerial economies

The employment of specialist managers by large businesses

Marketing economies

Where marketing costs per unit sold can be lowered by spreading marketing costs over larger output

Purchasing economies

benefit of buying materials in bulk or discounts

Technical economies

Reductions in unit costs arising from the effective use of technology

Define diseconomies of scale

factors that cause average costs to rise as the scale of operations increases.

Types of diseconomies of scale

1. Poor communication
2. Lack of commitment from employees
3. Weak coordination

Poor communication occurs because:

Managers in large businesses may no longer be able to communicate with employees directly

Lack of commitment from employees occurs because:

Demotivation due to lack of communication and

Weak coordination occurs because:

Communication

break-even analysis

the measure where the level of output were revenue equals total costs

the business is making neither profit or loss.

Purpose of break-even analysis

1. Calculate how many units it needs to sell before making profit.
2. Calculate the effect on profit of increasing and decreasing the price of a product.
3. Calculate the effects of profits of an increase or decrease in business costs.

Margin of safety

difference between your actual/expected profitability and the break even point (actual sales - break-even output)