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4.2 Costs, Scale of Production and Break-Even (1. Costs (Fixed Costs (…
4.2 Costs, Scale of Production and Break-Even
1. Costs
Fixed Costs
:pencil2: Costs which do not vary with output. They have to be paid whether or not the business is making sales.
Examples
- Rent
- Salaries (Managerial)
- Office supply costs
Variable Costs
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Examples
- Raw Materials
- Packaging
- Piece-rate labour costs
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3. Break-Even
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Margin of Safety
:pencil2: Number of sales above BE point (profit). The larger it is, the better.
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3. Break-Even Charts
Advantages
- Shows expected profit/loss, helps decision making
- Shows BE output needed
- Shows safety margin
- Shows area of profit/loss
Disadvantages
- Assumes all products are being sold
- "Straight line" assumption
- Only concentrates on BE, not other aspects (e.g reduce waste, increase sales)
- Fixed costs won't always be constant
Constructing a Graph
:red_cross: y axis - Costs and revenue ($)
:red_cross: x axis - Units of production
:red_cross: FC line does not change
:red_cross: TC line is addition of FC and VC
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:pencil2: Factors that lead to an increase in average costs as a business grows beyond a certain size
:pencil2: The quantity that must be produced/sold for total revenue to equal total costs. The point where a business doesn't make a profit or loss.
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:pencil2: Graphs showing how costs and revenues of a business change w/ sales. They show the level of sales the business must make to BE
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