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costs, scale of production and break-even analysis (business costs (fixed…
costs, scale of production and break-even analysis
business costs
fixed costs and variable costs
variable costs
include material costs and piece-rate labour costs
the more units produced, the higher the variable costs
fixed costs
include management salaries and rent paid for property
even if output was 0, costs still have to be paid
needed to calculate profit and loss
help managers to make decisions
can be either fixed or variable with output
TOTAL COST = FIXED + VARIABLE COST
economies & diseconomies of scale
economies of scale
purchasing economies
bulk buying discounts
marketing economies
transport advertising
financial economies
lower interest rates
managerial economies
specialists in all departments
technical economies
specialisation and latest equipment
diseconomies of scale
poor communication
low morale
slow decision making
break-even charts: comparing costs with revenue
concept
break-even level of output indicates to the owner or a manager of business the minimum level of output that must be sold so that the total costs are covered.
profit is not made at break-even point
the quicker a newly set up business can reach the break-even point, the more likely it is to survive
if a business never reaches a break-even point, then it will always make a loss
drawing a break-even graph
the y axis measures money amounts (cost and revenue)
the x axis shows the number of units produced and sold
fixed costs do not change at any level of output
the total cost line is the addition of variable costs and fixed costs
advantages
can look at
expected profit or loss
to be made at any level of output
the impact on profit or loss of certain business decisions can also be shown by
redrawing the graph
.
the chart could also be used to
show the safety margin
help in decision making
disadvantages
doesn't show the possibility that all goods may not be sold
fixed cost may vary overtime and are not always constant
assumed that costs and revenues can be drawn with straight lines
there are other aspects of the operations of a business