chapter 19 Flashcards
(22 cards)
define fixed 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. They are also
known as overhead costs.
define variable costs
Variable costs are costs
which vary directly with the
number of items sold or
produced
why might the manager think about the costs
The costs of two different locations for the new factory can be compared. This would help the owner make the best decision.
To help the manager decide what price should be charged for a product
define total costs
Total costs are fixed and
variable costs combined
define average cost per unit
Average cost per unit is
the total cost of production
divided by total output
what is the economies of scale
Economies of scale are
the factors that lead to a
reduction in average costs
as a business increases in
size
what are the different types of economies of scale
purchasing economy, managerial economy, marketing economy, financial economy, technical economy
describe the purchasing economy
Occurs when large firms buy raw materials in greater volumes and receive a bulk purchase discount, which lowers the average cost
This provides a cost advantage over smaller businesses
describe the managerial economy
Occurs when large firms can employ specialist managers who are more efficient at certain tasks, and this efficiency lowers the average cost. Managers in small firms often have to fulfil multiple roles and are less specialised
They may attract the best talent from other businesses increasing competitive advantage
describe the marketing economy
Occurs when large firms spread the cost of advertising over a large number of sales and this reduces the average costs
They can also reuse marketing materials in different geographic regions which further lowers the average costs
describe the financial economy
Banks are more willing to lend to large businesses as they present less of a risk than small businesses
They will be charged a lower rate of interest on their borrowings, reducing average costs
describe the technical economy
Occurs as a firm is able to use its machinery at a higher level of capacity due to the increased output
This spreads the cost of the machinery over more units and lowers the average cost
what is the diseconomies of scale
Diseconomies of scale are
the factors that lead to an
increase in average costs
as a business grows beyond
a certain size
what are the factors that cause diseconomies of scale
- poor communication
- lack of commitment from employees
- weak coordination
define break even level of output
Break-even level of output
is the quantity that must
be produced/sold for total
revenue to equal total costs
what is a break even chart
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
define revenue
The revenue of a business
is the income during a
period of time from the sale
of goods or services. Total
revenue = quantity sold ×
price
what is the break even point
The break-even point is the
level of sales at which total
costs = total revenue
what are the advantages of break even charts
- Managers are able to read off from the graph the expected profit or loss to be made at any level of output
- The impact on profit or loss of certain business decisions can also be shown by redrawing the graph
define contribution
The contribution of a
product is its selling price
less its variable cos
define margin of safety
Margin of safety is the
amount by which sales
exceed the break-even
point
what are the limitations of break even charts
- may be time consuming to prepare
- assumes that production and sales are the same
- assumes that the sale prices are constant at all levels of output
