Business - 4.2 Flashcards
(27 cards)
importance of business costs
- to calculate profit and loss
- decision making
- what price
- comparison
fixed costs - definition
- costs that do not vary in the short run with the number of items sold or produced
- must be paid despite sales
- known as overhead costs
variable costs - definition
- costs that vary directly with the number of items sold / produced
average cost - formula
total cost / output
total cost - formula
fixed + variable
total average cost of production - formula
total cost of production (in a period of time) / total output (in a period of time)
economies of scale - definition
- factors that lead to a reduction in average costs as a business increases in size
5 economies of scale
- purchasing economies (buying)
- marketing economies (selling)
- financial economies (borrowing)
- managerial economies (managing)
- technical economies (building)
purchasing economies - main point
- buying materials in bulk for discounts
marketing economies - main point
- spreading marketing costs
- cost of ads spread over more units, cheaper per item
managerial economies - main point
- large firms can hire expert managers
- specialised staff
financial economies - main point
- cheaper finance
- big business get lower interest rates / better loan deals
technical economies - main point
- better use of money
- can invest in advanced equipment
- increasing output and lowering cost per unit
diseconomies of scale - definition
factors that lead to an increase in average costs as a business grows beyond a certain size
3 diseconomies of scales
- poor communication
- lack of commitment from employees
- weak coordination
poor communication - diseconomies, mainpoint
- difficult to send and receive tasks in big companies
- leads to lower efficiency
lack of commitment from employees - diseconomies, mainpoint
- workers feeling unimportant
- too many people, unable to monitor all
- low commitment = low efficiency = increased costs
weak coordination - diseconomies, mainpoint
- longer decision making
- hard to coordinate the work and decision of all parts of the business
- hard to check for the same objective
break-even level of output - definition
- quantity that must be produced / sold for total revenue to equal total costs (break-even point)
revenue - meaning
amount of money received from the sale of a good / service
total revenue - formula
price x quantity
break-even point - formula
fixed costs / (selling price perunit - variable cost per unit)
breakeven sales revenue - formula
break-even output x selling price per unit
margin of safety - definition
indicates amount of sales that are above the break-even point
