18:Costs, scale of production
and break-even analysis
Presented by garbi,mony and hsu lae
Help to calculate whether or not the business will make a profit
Why manager or loss
need to think Help the owner make the best decision such as in choosing the
locations
about costs? Help the manager decide what price should be charged
1. Fixed Costs(overhead costs)
Cost which do not vary with the no. of items sold or produced
They have to be paid whether the business is making any sales
or not
Eg. Rent paid, salaries
Business cost
2. Variable Costs
Cost which vary directly with the no. of items sold or produced
Eg. Raw material costs
1. Total cost = Fixed costs + Total Variable Cost
Total cost and 2. Total cost = Average Cost per unit Output
Average cost 3. Average cost of production =
Economies of scale
When business buy large numbers of components
Purchasing Get discount reduces the unit cost of each item bought
economies Advantage over small business which buy in small quantities
Advantages for a large business when marketing its products
Marketing 1. Might be able to afford to purchases its own vehicle to
distribute goods
economies 2. Advertising is more effective
Large business able to raise capital more cheaply then small
Financial Bank would like to lend money because it is less risky
economies A lower rate of interest
Managerial Improve the efficiency because of the specialists
economies
Diseconomies of scale
If there is slow or inaccurate communication
Poor Mistakes occur
communication Lower efficiency
Higher average costs
Employees may feel less valued
Low motivation
Low Morale Low morale
Low efficiency
Push up average cost because they would make mistakes
Take a long time for workers to respond and act upon
Slow decision managers’ decision
making Managers may become too removed from the products and
market the firm operates in
Break Even Point
What is Break even point? (also known as Break even level of output)
Break even point is the level of sales at which total costs=total revenue.
BEP Chart
• BEP charts are graphs
which show how costs
and revenues of a
fit
business change with Pr o
sales.
• They show the level of
sales the business must SS
LO
make in order to break
even.
Advantages and Disadvantages of BEP
• Able to read the expected profit • Assume no inventories
or loss • Straight line assumption
• Can make the owners/ investors • Fixed costs not
to consider the business to alwaysoonstant
invest in this business or to
improve the business • Concentrate on break even
• Show BEP
Total fixed costs
• Show safety margin Break even point=
Selling price-Variable Cost
Selling price-Variable Cost = Contribution per unit
E.g. of BEP
Thank you for listening
