COSTS
Fixed Costs:
● Costs that remain constant regardless of the output produced or sold in the short run.
● E.g., rent remains the same even when production hasn't started.
Variable Costs:
● Costs that vary with the output produced or sold.
● E.g., material costs and wage rates depend on the output produced.
Total Cost Equation:
● Total Cost = Total Fixed Costs + Total Variable Costs
● Total Cost = Average Cost * Output
Average Cost (Unit Cost):
● Calculated as Total Cost divided by Total Output.
Economies of Scale:
● Factors leading to reduced average costs with an increase in business size.
● Includes purchasing, marketing, financial, managerial, and technical economies.
Diseconomies of Scale:
● Factors leading to increased average costs as a business grows beyond a certain size.
● Includes issues like poor communication, low morale, and slow decision-making.
Break-even Level of Output:
● Output level where total revenue equals total costs, resulting in neither profit nor loss.
Advantages of Break-even Charts:
● Help assess profit or loss at different output levels.
● Allow managers to simulate cost and revenue changes and their impacts on profit.
Limitations of Break-even Charts:
● Assumes all produced units are sold, ignoring inventory.
● May not account for fluctuating fixed costs and non-linear cost changes.
Fixed Costs:
● Costs that remain constant regardless of the output produced or sold in the short run.
● E.g., rent remains the same even when production hasn't started.
Variable Costs:
● Costs that vary with the output produced or sold.
● E.g., material costs and wage rates depend on the output produced.
Total Cost Equation:
● Total Cost = Total Fixed Costs + Total Variable Costs
● Total Cost = Average Cost * Output
Average Cost (Unit Cost):
● Calculated as Total Cost divided by Total Output.
Economies of Scale:
● Factors leading to reduced average costs with an increase in business size.
● Includes purchasing, marketing, financial, managerial, and technical economies.
Diseconomies of Scale:
● Factors leading to increased average costs as a business grows beyond a certain size.
● Includes issues like poor communication, low morale, and slow decision-making.
Break-even Level of Output:
● Output level where total revenue equals total costs, resulting in neither profit nor loss.
Advantages of Break-even Charts:
● Help assess profit or loss at different output levels.
● Allow managers to simulate cost and revenue changes and their impacts on profit.
Limitations of Break-even Charts:
● Assumes all produced units are sold, ignoring inventory.
● May not account for fluctuating fixed costs and non-linear cost changes.
