Costs and Break-even Analysis - Simple Step-by-Step Notes (Page 1)

Flashcards covering fixed vs. variable costs, total and average costs, economies/diseconomies of scale, break-even analysis, and margin of safety.

What are fixed costs?

Costs that do not change with the level of production (e.g., rent, insurance, manager's salary).

What are variable costs?

Costs that increase as production increases (e.g., leather for shoes, wages paid per shoe).

What is the formula for total costs?

Total costs = Fixed costs + Variable costs.

How do you calculate average cost per unit?

Average cost per unit = Total costs ÷ Number of units produced.

What typically happens to average cost per unit as production increases?

Average cost per unit usually falls as output increases (economies of scale).

Why are costs important to managers?

They help set prices, decide whether to continue or stop operations, and choose the best location with the lowest total cost.

What is economies of scale?

A decrease in average costs as the business grows due to factors like bulk buying, better machines, and specialized managers.

What are diseconomies of scale?

An increase in average costs as the business grows too large, caused by poor communication, demotivated workers, and confusion.

What is the break-even point?

The output level at which total revenue equals total costs, so there is no profit or loss.

What happens when sales exceed the break-even point?

Profit is earned.

What happens when sales are below the break-even point?

A loss occurs.

What is the margin of safety?

The amount by which actual (or projected) sales exceed the break-even level.