Costs, scale of Production and break even analysis

Fixed Costs

Costs that remain the same and dont change with output

Variable Costs

Costs that change in direct proportion of output

Purchasing Economies of Scale

The larger that a business gets increases their demand for resources and so they purchase in bulk which allows them discount and so can pay a lower average cost while purchasing

Managerial Economies of Scale

The larger their business increases their ability to hire specalist managers for different fields which can increase their efficiency and output

Financial Economies of Scale

The larger a business is the more that banks trust them to take loans at lower interests

Marketing Economies of Scale

As a business grows their marketing increases but their output may increase more which can lead to lower average marketing costs

Technical Economies of Scale

Larger businesses can invest more in machinery and technology that can increase the productivity and effiency of the business and reduce their average costs

Diseconomies of Scale

1. Poor Communication

2. Weak Coordination

3. Less Control

4. Less Commitment

Break Even Output

Is the output where total revenue is equal to total costs (Fixed Costs/Contribution per unit)

Margin of Safety

The difference between the current output and the break even output

Advantages

• Shows the amount of output that must be produced to show that total revenue is equal to total costs

• Shows the effect on profit with a change in variable costs , fixed costs, selling price

• Shows changes in margin of safety as sales change

Limitations

• Assumes that costs can be represented by straight line

• Some costs can be hard to classify

• Output does not automatically mean sales