How do we calculate the break even point?
Contribution = Unit price - Variable Cost per unit
Break even point = Fixed cost/Contribution
What are fixed costs?
Costs that don’t vary with output.
- Heating and lighting, rent, salaries, marketing costs.
What are the limitations of break even charts?
- Assumes that variable costs stay the same, which isn’t necessarily true because as they produce more, they benefit from economies of scale and reduces cost per item.
- Assumes that the selling price will remain the same for all products sold.
- Revenue and cost lines both assume that only one type of product is being sold.
Why is quality important?
- Increase price
- Increase competitiveness
- Increase brand image
- Increase customer loyalty
- Decrease cost from mistakes
Satisfies customers - HAPPY :)
Return customers - satisfied customers = likely to use business again
Word of mouth promotion - satisfied customers tell others about the business
Higher prices can be charged
Define quality assurance
When checks are carried out within the production process to prevent mistakes from happening.
- Making quality a key aspect of everyone’s job
- Doesn’t require employing additional quality chekcers, so it is cheaper
- The whole workforce must support the system, or else it won’t work
- Employees may require additional training = increase costs
Define economies of scale
The cost advantages a business gains due to an increase in the scale of production.
This means the business has lower unit costs because of its larger size.
What are total costs?
Fixed cost + Variable cost
What are average costs?
Average cost or cost per unit = Total cost/Total output (number of items made)
What is total revenue?
Total revenue = Price x Output
Define price elasticity of demand
The responsiveness of demand following a change in price
Price elastic is when the demand for the product is responsive to the changes in price
Price inelastic is when the demand for the product is not very responsive to the changes in price
How sensitive a product is to changes in its price is affected by:
- Availability of substitutes
- Buyer’s knowledge
- Ability to switch costs
Define quality control
When an indivual checks at random at the end of the process to ensure that the product is up to quality.
- Ensure product meets customer requirement = more sales = better reputation
- Identify poor quality products = reduces chance of faulty product sold to customer
- Can be expensive (requires people and time)
- Doesn’t improve quality
- Doesn’t check all products
What are the different diseconomies of scale?
Poor communication - becomes harder to communicate effectively with employees = carrying out tasks incorrectly.
Lack of commitment from employees - employees lower down organisational chart have less contact with management and feel less important = decrease in motivation = lower productivity.
Weak coordination - find it hard to coordinate employees and resources efficiently
Increased need for delegation - more work to complete = more delegation to other employees who might not make the right decisions or take longer = insufficienies
Meeting and exceeding customer expectations.
When revenues are matched exactly by costs and neither a profit or loss is made.
Define diseconomies of scale
The cost disadvantages a business incurs due to an increase in the scale of production.
As they produce more, productivity decreases and the unit costs rise.
What are the different economies of scale?
Technical - using advanged machinery and technology can reduce the unit cost of production.
Purchasing - Bulk buying: when larger quantities are bought and can negociate lower prices = lower unit costs.
Managerial - The best specialist managers can be employed; cost effective, administrative procedures can be adopted.
Financial - Larger firms are considered less risky = lower interest rates; wider choice of financing option.
Marketing - Marketing costs are spread over a greater output so keeps unit cost down = efficient
What are variable costs?
Costs that vary with output,