Costs, Scale Of Production And Break-Even Analysis: Identify And Classify Costs (Copy)
Cheat Sheet: 4.2.1 Identify and Classify Costs
Types of Costs
| Cost Type | Definition | Example |
|---|---|---|
| Fixed Costs (FC) | Do not change with output | Rent, insurance, salaries |
| Variable Costs (VC) | Change directly with output | Raw materials, packaging |
| Total Costs (TC) | FC + VC | Rent ($1000) + Materials ($500) = $1500 |
| Average Costs (AC) | TC ÷ Output | $1500 ÷ 300 units = $5 per unit |
| Marginal Cost (MC) | Cost of producing one more unit | Extra $2 for one more toy |
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Business Studies Full Scale Course
Using Cost Data for Decisions
| Decision | Explanation | Example |
|---|---|---|
| Stop Production | If price < average variable cost | Selling at $3, but AVC = $4 → stop production |
| Continue Production | If revenue covers variable costs and some fixed costs | Price = $6, AVC = $4, FC partly covered |
| Expand Output | If producing more reduces average cost (economies of scale) | Mass production of cars reduces AC |
Key Notes
- Fixed costs per unit ↓ as output rises (spread over more units).
- Variable costs per unit often stay constant, but total VC rises with output.
- Cost data helps in pricing, production level, survival decisions.
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Business Studies Full Scale Course
Quick Revision Bullets
- FC = unchanged with output (rent, salaries)
- VC = changes with output (raw materials)
- TC = FC + VC
- AC = TC ÷ units
- Cost data used to decide whether to continue, stop, or expand production
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Business Studies Full Scale Course