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Chapter 18 (Business cost (Fixed costs (Costs that do not vary with the…
Chapter 18
Business cost
Why businesses calculate cost
Costs can be compared with the revenue made from selling products and providing service to calculate the loss or profit that the business made
Help decide the price of a product or service
Fixed costs
Costs that do not vary with the number of items sold or produced in the short run.
Need to be paid even if no sales are made.
Also known as overhead sales
Variable costs
Costs which vary directly with the number of items sold or produced
Total cost
Fixed + variables = total cost of production
total cost of production x output =
Total cost
Average cost
Total cost of production / total output
Break-even charts
break-even level of output
The quantity that must be produced /sold for total revenue to be equal to total costs
How to draw break-even charts
Variable costs
Fixed costs
Revenue
Break-even point
The levels of sale where total costs is equal to total revenue
Calculation: total fixed costs/selling price - variable costs
Economies and Diseconomies of sale
Economies of scale
Marketing economies
Advertising rates, transportation
Financial economies
Lower interest rates
Purchasing economies
Discount in buying bulks
Technical economies
Specialization and latest equipment
Managerial economies
Specialist in all departments
Diseconomies of scale
Poor communication
Low morale
Slow decision making
Economies of scale are the factors that lead to a reduction in average costs as a business increases in size
Diseconomies of scale is the opposite