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Chapter 19 - Coggle Diagram
Chapter 19
Economies of scale are the factors that lead to a reduction in average costs as a business increases in size
Purchasing economies - When businesses buy large numbers of components they are able to gain discounts for buying in bulk, reducing the average cost per unit
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Managerial economies - Larger companies can afford specialists and that increases their efficiency, reducing average costs
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Business costs
Fixed costs are costs which do not vary in the short run with the number of items sold or produced. They have to be paid whether the business is making any sales or not
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Average cost per unit is the total cost of production (in a time period) divided by the total output (in a time period)
Using cost data
Setting prices - If the average cost per unit is not known, the business could charge a price that leads to a loss being made on each item sold
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Deciding on the best location - Costs are not the only factor to consider as there might not be any point in choosing a low-cost location for a new shop if it is in the worst part of town
Diseconomies of scale are the factors that lead to an increase in average costs as a business grows beyond a certain size
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Lack of commitment from employees - Large businesses may employ thousands of workers which makes it possible that a worker will never see the top managers. This makes them feel unimportant and not valued by the management
Weak coordination - Takes longer for decisions made by managers to reach all parts of a large business and different groups of workers
Break even charts are graphs which show how costs and revenues of a business change with sales. They show the level of sales the business must make in order to break even
Pros :
- Managers are able to read off the graph the expected profit or loss to be made by any point
- The impact on profit or loss of certain business decisions can be shown by redrawing the graph
- Can be used to show the margin of safety (the amount by which sales exceed the break even point
Cons :
- Break even charts are constructed assuming that all goods produced by the firm are actually sold
- Fixed costs only remain constant if the scale of production does not change
- Break even charts only focus on the break even point of production whilst there may be many other aspects of the operations of a business that needs to be analysed
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