Unit 4.2 Costs, scale of production and Break Even Flashcards
(31 cards)
Fixed Costs
Costs that do not vary with the level of output e.g. rent
Variable Costs
Costs which vary with the level of output. The higher the level of output, the higher the variable costs vice versa. E.g. raw materials
Average Costs
Total Costs/Quantity
Total Costs
Fixed Costs + Variable Costs
Breakeven Point
The level of output where the sales revenue is EQUAL to the total costs
Revenue
Money received from the sale of a good or service
Total Revenue
Price x Quantity
Breakeven level of output
The output needed to be produced and sold in order to start making profit
Break even point
Fixed costs/Selling price per unit-variable costs per unit
Break even sales revenue
Breakeven output x Selling price per unit
Margin of Safety
- Indicates the amount of sales that are about the breakeven point
- Safety Net
- Anything about your break-even point
Margin of safety
Sales output - Break even output
Break-even Output analysis Disadvantages
- It assumes that sales prices are constant at all levels of output
- It assumes production and sales are the same
- It can only apply to a single product
Economies of Scale
The benefits or advantages enjoyed by the firm as it expands its scale of production, leading to a decrease in the average costs
Internal Economies of scale
Benefits enjoyed by the firm ITSELF as it expands
Financial economies
Large firms are able to raise capital more cheaply than smaller firms
Purchasing economies
Benefits enjoyed by large firms when they buy supplies or raw materials in bulk
Managerial Economies
Large firms are able to pay for specialised managers
Risk Bearing Economies
Large firms can spread out their risks producing different type of products or establishing different branches
Technical Economies
Ability to afford modern tech and equipment.
- Higher efficiency and Lower average costs
Marketing Economies
Large firms enjoy marketing benefits e.g. advertising purchasing of their own vehicles
External Economies of Scale
Benefits enjoyed by the firm as the whole industry expands
External Economies of Scale -
Development of Specialist firms
When the industry expands, specialised firms are attracted to the region, providing essential services for the whole industry at a lower cost e.g. transport etc.
External Economies of Scale - Pool of skilled labour
When the industry expands, quality workers will be attracted to that region and all in the industry will be able to employ skilled workers at a lower cost
