Chapter 4.2: Flashcards
(20 cards)
What are fixed costs?
Costs that do not vary with output produced or sold, such as rent, insurance, and salaries.
What are variable costs?
Costs that are directly associated with the output produced or sold, such as materials used in production.
What are total costs?
The sum of fixed costs and variable costs.
What is average cost?
The cost per unit of output, calculated by dividing total cost by the total output.
What are economies of scale?
Factors that lead to a reduction in average costs as a business increases in size.
What are purchasing economies of scale?
When a business buys materials in bulk to receive discounts, reducing the unit cost.
What are marketing economies of scale?
When a business benefits from reduced marketing costs as it grows, like lower advertising rates.
What are financial economies of scale?
When large businesses can access cheaper financing, such as lower interest rates on loans.
What are managerial economies of scale?
When large businesses can afford to hire specialist managers who improve operational efficiency.
What are technical economies of scale?
When large businesses invest in technology or machinery to improve productivity, such as using automated machines.
What are diseconomies of scale?
When average costs increase due to factors like poor communication, low morale, and slow decision-making in large businesses.
What is break-even analysis?
A method to determine the level of output required for a business to cover all its costs, where no profit or loss is made.
What is the break-even point?
The output level at which total revenue equals total cost, resulting in neither profit nor loss.
What is the margin of safety?
The difference between the actual output and the break-even output, indicating how many sales can be lost before a business starts making a loss.
What is the formula for total revenue?
Total Revenue = Price × Quantity Sold.
What is the formula for total cost?
Total Cost = Total Fixed Costs + Total Variable Costs.
How do you calculate average cost?
Average Cost = Total Cost ÷ Total Output.
How do you calculate break-even quantity?
Break-even Quantity = Total Fixed Costs ÷ Contribution per Unit.
What is the formula for contribution?
Contribution = Selling Price - Variable Cost per Unit.
What are the limitations of break-even analysis?
Assumes all products are sold, selling price remains unchanged, does not account for inventory holding costs, and may not be 100% accurate.
