business costs

What are fixed costs?

Costs that do not change as output changes. Paid even if output is zero (e.g., rent, salaries).

How are fixed costs represented on a graph?

A horizontal line on a cost-output graph.

What are variable costs?

Costs that change directly with the level of output (e.g., raw materials, wages).

How are variable costs represented on a graph?

An upward-sloping line starting at the origin (0,0).

What is the formula for Total Costs (TC)?

TC = TFC + TVC

Can Total Costs be zero?

No, because fixed costs are always present.

What is Average Cost (AC)?

Cost per unit of output.

How does Average Cost (AC) change with output?

Initially decreases (economies of scale), then rises (diseconomies of scale).

What is the shape of the Average Cost curve?

U-shaped.

What is the formula for Total Variable Costs (TVC)?

TVC = Variable Cost per Unit × Quantity (Q)

What is the formula for Average Cost (AC)?

AC = TC / Q

Why is accurate cost data important?

Helps in reducing costs, setting prices, making production/location decisions.

How can fixed costs be reduced?

Relocate to cheaper premises, negotiate lower utility rates.

How can variable costs be reduced?

Source cheaper materials, bulk buy, outsource.

What are economies of scale?

Efficiencies gained from increased output, leading to lower average costs.

What is a purchasing economy of scale?

Buying in bulk to reduce unit cost.

What is a managerial economy of scale?

Hiring specialist managers to increase efficiency.

What is a marketing economy of scale?

Spreading advertising cost over more sales.

What is a financial economy of scale?

Larger firms get lower interest rates from banks.

What is a technical economy of scale?

Using machinery more efficiently over more units.

What are diseconomies of scale?

Increasing average costs due to inefficiencies as a business grows.

How does poor communication cause diseconomies of scale?

Slower communication, more errors → increased costs.

How does weak coordination affect large firms?

Makes decision-making harder and slower → increases costs.

How does lack of commitment affect costs?

Demotivated workers lower productivity → increased AC.

What is break-even analysis?

Tool to determine the minimum output where total revenue = total costs.

What is the formula for break-even point in units?

Fixed Costs / (Selling Price − Variable Cost per Unit)

What is the formula for break-even point in value?

BEP in Units × Selling Price

What is contribution per unit?

Selling Price − Variable Cost per Unit

What is the margin of safety?

Actual Sales − Break-even Sales

What does a large margin of safety indicate?

The business can afford to lose sales and still break even.

List two uses of break-even analysis.

Set pricing strategies, monitor performance over time.

List two limitations of break-even analysis.

Assumes all products are sold; assumes linear cost/revenue relationships.

Why do businesses need finance?

Start-up capital, expansion, and working capital.

What's the difference between short-term and long-term finance?

Short-term: <12 months (e.g., overdrafts); Long-term: many years (e.g., loans).

What are internal sources of finance?

Money from within the business.

Give examples of internal finance.

Owner’s capital, retained profit, sale of assets, working capital management.

What is an advantage of retained profit?

No interest, maintains control.

What is a disadvantage of retained profit?

Shareholders miss dividends; may not be enough.

What is a risk of using owner’s capital?

Personal savings lost; limited funds available.

What are external sources of finance?

Money from outside the business (e.g., loans, grants).

What is debt factoring?

Selling unpaid invoices for immediate cash (at a discount).

What is crowdfunding?

Raising small amounts from many people online.

What is a debenture?

A long-term loan to a company, repaid with interest.

What’s the difference between hire purchase and leasing?

HP ends in ownership; leasing is rental without ownership.

What is trade credit?

Delaying payment to suppliers (e.g., 30/60/90 days).

What is a bank overdraft?

Spending more than is in the bank account (up to a limit).

What is a bank loan?

Borrowed money repaid with interest over time.

What are grants or subsidies?

Money from government/agencies that doesn’t usually need to be repaid.

What is microfinance?

Small-scale financial support for startups in developing countries.