Costs, Scale of Production and Break-even Analysis (Copy)
- Business Costs
- Costs of operation can be compared with revenues
- Two different locations can be compared
- What price should be charged for the products
- Fixed costs
- Costs that remain the same up to a level, and then increase
- Variable costs
- Cost that increases with each new unit sold
- Total cost and average cost
- Fixed cost plus variable cost
- Average cost per unit is the total cost divided by total production
- Cost data
- Setting prices
- Deciding if the production is continued or not
- Best location decisions
- Economies of Scale
- Increased scale of production reducing average costs.
- Purchasing economies
- Discount on bulk purchases
- Marketing economies
- Marketing products such as own vehicles can reduce costs
- Staff requirements of marketing will not increase at the same scale as production
- Financial economies
- Better terms for raising capital
- Managerial economies
- Hire better managers and specialist managers
- Technical economies
- Better technology
- Division of labor
- Better machinery
- Diseconomies of Scale
- When too large a business than average costs start to rise
- Poor communication and decision implementation
- Lack of commitment from employees as so many workers so changing them can be costly
- Weak coordination and implementation delays
- Break even charts
- Break even no profit no loss point
- Break even chart
- Revenues drawn
- Fixed cost drawn, straight line horizontal
- Variable cost starts from zero
- Total cost starts from fixed cost plus the variable cost line
- It shows the break even point
- Any sales after this point is profit
- Benefits
- Expected profit and loss calculated
- Redrawing graph to determine different scenarios
- Margin of safety is how much more production than break even level
- Limitations
- Actual situation can differ
- Fixed costs may jump as well
- Other operations of business not considered
- Assumptions of straight lines instead of curves in the graphs
- Break even point
- Sale price – variable cost = contribution per unit to fixed cost
- Fixed cost/ contribution per unit = total units required for breakeven
- Total units required for breakeven * selling price = total value of breakeven sales