chapater 19- costs,scale of production and break even ana

Question 1

What happens when a business never reaches break-even point

Answer 1

Business will always make a loss

Question 2

Total revenue formula

Answer 2

Quantity sold x price

Question 3

define Variable costs

Answer 3

Costs which vary directly related with the number of items sold or produced

Question 4

Fixed costs

Answer 4

Costs which do not vary in the short run with the number of items sold or produced. Have to be payed whether the business is making sales or not
Overhead costs

Question 5

Total costs

Answer 5

Fixed and variable costs combined

Question 6

Average cost per unit formula

Answer 6

TOTAL COST/ TOTAL OUTPUT

Question 7

Use of cost data (3)
Explanation of each

Answer 7

Selling prices - to make sure the business doesn’t make a loss on each unit sold
Deciding whether to stop/continue production - business can decide based on when the product was launched and if fixed costs still must be paid
Deciding on the best location - why choose a cheap spot if it’s in the worst part of town

Question 8

Economies of scale
(5)

Answer 8

• Purchasing economies - bulk-buying discounts that reduce costs.
• Marketing economies - Large businesses can afford their own vehicles to distribute goods rather than other firms which reduces transport costs. Average costs will thus reduce.
• Financial economies - raise large sums of capital cheaper than small businesses as banks consider loaning to smaller businesses less risky and charge a lower interest rate
• Managerial economie - able to afford to hire specialist managers who are very efficient and can reduce the business’ costs.
• Technical economies - afford to buy large machinery that can produce a large output and reduce average costs.

Question 9

diseconomices of scale (3)

Answer 9

• Poor communication - The larger, the more difficult it is to send and receive accurate messages
• Low commitment from employees: Workers may feel they are just a number, small businesses can establish close relationships between workers and top-level management.
• Slow decision-making: As a business grows larger, its chain of command will get longer. Communication will get very slow and so any decision-making will also take time, since all employees and departments may need to be consulted with.

Question 9

define Diseconomies of scale

Answer 9

factors that lead to an increase the average costs of a business as it grows beyond a certain size

Question 10

how to avoid any diseconomies from arising?

Answer 10

Businesses will have to divide themselves into small units that can control themselves and communicate more effectively

Question 11

define Economies of scale

Answer 11

factors that lead to a reduction in average costs as a business increases in size

Question 12

define Break-even level of output and state the formula

Answer 12

• break-even output is the output at which total revenue equals total costs
• Break-even level of output/break-even point

neither a profit nor loss is made, all costs are covered

Question 13

Break-even charts

Answer 13

Graphs which show how costs and revenues of a business change with sales by showing the level of sales the business must make in order to break in

Question 14

Revenue

Answer 14

Income during a period of time from the sale of goods/services

Question 15

Advantages of break-even charts (3)

Answer 15

• Managers can read off the expected profit/loss to be made at any level of output
• Impact on profit/loss of certain business decisions can be shown by redrawing the graph
• Can be used to show the margin of safety
• Helps planning/forecasting/decision-making
• Help apply for finance

margin of safety- is the amount by which sales exceed the bre

Question 16

Limitations of break-even charts (4)

Answer 16

• Graph does not show the possibility that inventories may build up if not all goods are sold
• Fixed costs only remain constant if the scale of production does
• They only concentrate on break-even level of production and ignore other important business operations
• Costs and revenues can’t always be drawn with straight lines

Question 17

Contribution
formula

Answer 17

Selling price - the variable cost

Question 18

Break even level of production formula

Answer 18

Total fixed costs / contribution per unit

Question 19

margin of safety fourmula

Answer 19

current sales - the breakeven point

Question 20

Outline two ways of increaseing margin of safety. (3)

Answer 20

• Lower fixed costs
• Lower variable costs / variable cost per unit
• Increase price