4.2 - costs, scale of production and breakeven analysis

Question 1

what are fixed costs (overheads)?

Answer 1

costs that do not change with the number of items sold or produced. They have to be paid regardless if the business sells the products or not e.g., Rent, management salaries.

Question 2

what are variable costs?

Answer 2

Variable Costs: These are costs that do change with the number of items sold or produced. E.g., raw material costs, piece rate labour. ​

Question 3

what are total costs?

Answer 3

Total Costs= Total Variable costs + Total Fixed Costs ​

Question 4

what are average (unit) costs?

Answer 4

​Average Cost (Unit Cost)= Total Costs of production /Total Output ​

Question 5

what is total revenue?

Answer 5

Total Revenue= Price x Quantity sold ​

Question 6

what is profit?

Answer 6

Profit= Total Revenue – Total Costs

Question 7

what is the concept of breakeven?

Answer 7

The breakeven level of output is the quantity of goods that must be produced/sold for total revenue to equal total costs. ​at this point the business have covered all of their costs

Question 8

what is the calculation of breakeven?

Answer 8

Fixed costs/contribution per unit

Question 9

how do you calculate contribution per unit?

Answer 9

selling price- variable cost per unit

Question 10

what is the margin of safety?

Answer 10

the amount by which current sales exceed the breakeven point. it is calculated by (current sales - breakeven point)

Question 11

draw a breakeven graph

Answer 11

check teams

Question 12

what are the benefits and drawbacks of breakeven analysis?

Answer 12

• managers can read off the graph how much profit/loss the business has made at any level of output​
• allows the business to see the impact on the Breakeven Point if the business decides to increase the Selling price /decrease Variable Costs ​
• allows the business to see the Margin of Safety, to determine if they are at high/low risk of making a loss ​
• breakeven calculations may be inaccurate if the selling price changes over time. E.g. at times the business might have to reduce their selling price to attract customers causing the calculation/BEP to be inaccurate. ​
• assumes the fixed costs never change with output. However, eventually they will increase if the business has to move to a bigger factory as rent costs will increase ​