Embedded Files
Costs
Fixed Costs
Do NOT change with output
(e.g., rent, salaries)
Variable Costs
Change with output
(e.g., materials, piece-rate labor)
Total Cost
TC = FC + VC
Average Cost
Using Cost Data
Setting prices: businesses use cost data to decide the minimum price needed to cover costs and make profit.
Deciding to continue/stop production: managers compare costs with revenue to judge if a product is still profitable.
Choosing location: cost data helps compare rent, labor, and transport costs across different sites.
Selecting production methods: firms analyze cost differences between labor‑intensive and capital‑intensive options.
Budgeting and forecasting: cost data helps predict future spending and plan financial needs.
Controlling costs: managers identify where costs are rising and take action to reduce them.
Economies of Scale:
Purchasing economies – buying in bulk lowers the cost per unit of materials.
Marketing economies – advertising costs are spread over more units, reducing cost per units.
Financial economies – large firms can borrow money at lower interest rates.
Managerial economies – specialist managers improve efficiency and reduce overall costs.
Technical economies – large firms can afford advanced machinery that lowers average costs.
Risk‑bearing economies – big firms can spread risks by offering a wider range of products or markets.
Diseconomies of Scale
Poor communication
Low employee motivation
Weak coordination
Break-even Analysis
Break-even Output
Where Total Revenue = Total Costs
Contribution=Selling price − Variable cost
Margin of Safety
Actual sales − Break-even sales
Uses of Break-even Charts
Shows profit/loss at any output
Helps pricing decisions
Helps cost control
Limitations
Assumes all output is sold
Fixed costs may change
Lines may not be straight in reality
Ignores external factors
NOTES DONE BY FARIDA SABET
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