Cost Calculations
A business has fixed costs of $1,500 and total variable costs of $2,400. Calculate total costs.
Total costs = $1,500 + $2,400 = $3,900.
A business increases output and its average cost falls. Identify this benefit.
Economies of scale.
Selling price is $12 and variable cost per unit is $7. Calculate contribution per unit.
$12 − $7 = $5 per unit.
What happens to profit when costs fall?
Profit can increase.
Why might a business want to lower its average costs?
To reduce costs and increase profit.
A business produces 800 units. Total variable costs are $2,800. Calculate variable cost per unit.
$2,800 ÷ 800 = $3.50 per unit.
A large manufacturer receives lower prices after buying raw materials in bulk. Identify the type of economy of scale.
Purchasing economies of scale.
Fixed costs are $2,400 and contribution is $6 per unit. Calculate break-even output.
$2,400 ÷ $6 = 400 units.
What happens if a business sells below its break-even output?
The business makes a loss.
A café wants to buy a new machine. What should it check before buying it?
Whether it can afford the machine and expects enough sales.
Fixed costs are $3,600. Variable cost is $4 per unit. Output is 900 units. Calculate total costs and average cost.
TVC = $4 × 900 = $3,600
TC = $3,600 + $3,600 = $7,200
AC = $7,200 ÷ 900 = $8 per unit.
Explain how employing specialist managers could reduce a large business's average costs.
Specialist managers may make better decisions and improve efficiency, reducing waste or increasing productivity. Costs are spread across more units.
Fixed costs are $3,000, selling price is $15 and variable cost is $9. Calculate break-even output.
Contribution = $15 − $9 = $6
Break-even = $3,000 ÷ $6 = 500 units
Why can a lower selling price be risky?
The business earns less contribution per unit and must sell more to break even.
Alex wants to make 300 sandwiches instead of 200. What is one risk?
Some sandwiches may not sell and could be wasted.
A business produces 1,200 units. Fixed costs are $4,000 and total costs are $10,600. Calculate variable cost per unit and average cost.
TVC = $10,600 − $4,000 = $6,600.
Variable cost per unit = $6,600 ÷ 1,200 = $5.50.
AC = $10,600 ÷ 1,200 ≈ $8.83 per unit.
A large business has many levels of management. Explain how this could lead to diseconomies of scale.
Messages may take longer to reach workers, causing delays and mistakes. This can reduce efficiency and increase average costs.
A business sells its product for $20. Variable cost is $12 per unit and fixed costs are $4,800. If actual sales are 750 units, calculate break-even output and margin of safety.
Contribution = $20 − $12 = $8
Break-even = $4,800 ÷ $8 = 600 units
Margin of safety = 750 − 600 = 150 units
How can diseconomies of scale affect a business as it grows?
Average costs can increase, reducing profit.
A supermarket grows quickly and opens several new stores. Explain one problem this growth could cause.
Communication may become more difficult, leading to poor coordination and higher average costs.