costs, scale-of-production and break-even analysis

define fixed costs

costs which don’t vary in the short run with the amount of output produced

define variable costs

costs which vary directly with amount of output sold or produced

define average cost per unit

total cost of production divided by output

methods of using cost data

setting prices

deciding whether to halt or continue production

deciding best location

define economies of scale

factors that lead to a reduction in average costs as a business increases in size

what are the types of economies of scale

purchasing/bulk-buying

financial

managerial

technical

marketing (transport)

different types of diseconomies of scale

poor communication

lack of employee commitment

weak coordination

define break-even level of output

the quantity that must be sold for total costs to equal total revenue

formula to calculate break-even output

total fixed costs / (selling price - variable cost) (contribution)

advantages of break-even charts

expected profit/loss can be seen for each level of output

impact of business decisions can be seen

shows margin of safety

disadvantages of break-even charts

not all output is sold

FC not constant if scale of production is changed

doesn’t take other factors into consideration

costs and revenue aren’t always linear