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Cost Analysis in Business Production

This document provides an overview of costs, economies and diseconomies of scale, and break even analysis in business. It defines fixed and variable costs, and how total costs are calculated. It describes the factors that lead to reductions in average costs from economies of scale, such as purchasing, marketing, financial, managerial and technical economies. However, it also notes that diseconomies of scale can occur from issues like poor communication, lack of efficiency and weak coordination in very large organizations. The document concludes by explaining how break even analysis can be used to determine the minimum level of output needed to cover total costs, and the advantages and limitations of this approach.

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Alina Smolian
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30 views3 pages

Cost Analysis in Business Production

This document provides an overview of costs, economies and diseconomies of scale, and break even analysis in business. It defines fixed and variable costs, and how total costs are calculated. It describes the factors that lead to reductions in average costs from economies of scale, such as purchasing, marketing, financial, managerial and technical economies. However, it also notes that diseconomies of scale can occur from issues like poor communication, lack of efficiency and weak coordination in very large organizations. The document concludes by explaining how break even analysis can be used to determine the minimum level of output needed to cover total costs, and the advantages and limitations of this approach.

Uploaded by

Alina Smolian
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

BUISSINES STUDIES:

CHAPTER 19: Costs, scale of production and break even analysis

ALL business activity involves some kind of cost

-costs are lower than revenue-> profit

Fixed costs- stay the same regardless of the amount of output.


Eg. Fulltime salaries/rent

Variable costs- vary with the amount of goods produced


eg. Material costs/ part time salaries

Total cost of production= fixed + variable costs

Average costs of production- total cost of production


(unit cost) total output

Total cost = average cost per unit x output

Using cost data

- Setting prices
- Deciding whether to stop production
- Chosing the best location

Economies of Scale

- Factors that lead to reduction in average costs that are achieved by business
growth

Diseconomies of scale

Economies of scale

Types of Economies of Scale

-Purchasing economies = discounts on bulk orders


-Marketing = larger businesses afford their own vehicles, increase of sales stuff
won’t increase in the same proportion as product lines = reduced average costs
-Financial = larger businesses can borrow larger amounts of money from the
bank with lower interest
-Managerial = larger businesses can afford specialist managers in all
departments which increases efficiency
-Technical = Larger businesses can afford better equipment+ flow production
which increases the output

Diseconomies of scale
Some businesses become inefficient as they become larger
- Increase of businesses average costs as it grows

Reasons:
-large organisation + poor communication, longer to make deals, mistakes
- lack of commitment and efficiency = large companies hire thousands of workers
and not being able to see their employers may make workers feel unappreciated
/ unmotivated
- weak coordination = it takes longer for decisions of managers to reach all parts
of a business, makes it harder to work towards objectives effectively

Break even charts


-breakeven level of output =minimum level of output that must be sold to cover
total costs
Breakeven point= total costs and total revenue cross ( above = profit, below +
loss)
Revenue- income during a period of time (total revenue = quantity sold sold
price)

Advantages:
- Expected profit loss
- Impact of business decisions (redrawing graph)
- Margin of safety (amount by which sales exceed break even point)

Limitations:

- Assumes all goods produced are sold


- Other aspects besides break even point
- Assumes that costs and revenues are constant and can be represented by a
straight line

Break even point calculation =


Selling price – variable cost = contribution

Total fixed costs/contribution per unit

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