.

• What are fixed costs?

  Costs that do not vary with output produced or sold in the short run
• Why do fixed costs remain the same in the short run?

  They are incurred even when the output is 0
• Give an example of a fixed cost.

  Rent
• What are variable costs?

  Costs that directly vary with the output produced or sold
• How do variable costs change with production levels?

  They increase or decrease directly with the output produced
• Provide examples of variable costs.

  Material costs and wage rates based on output
• What is the formula for total cost?

  Total Cost = Total Fixed Costs + Total Variable Costs
• How can total cost also be expressed in relation to average cost?

  Total Cost = Average Cost x Output
• What is the formula for average cost?

  Average Cost = Total Cost / Total Output
• How can a business use cost data for decision-making?

  • Setting prices
  • Deciding whether to stop production
  • Choosing the best location
  • Setting budgets
• What are economies of scale?

  Factors that lead to a reduction in average costs as a business increases in size
• What is an example of purchasing economies?

  Bulk-buying discounts for large output
• How do marketing economies benefit larger businesses?

  They can afford their own distribution vehicles and reduce marketing labor costs
• What are financial economies?

  Large businesses are more likely to receive loans at lower interest rates
• How do managerial economies work?

  Large businesses can hire specialist managers who improve efficiency
• What are technical economies?

  Large businesses can invest in machinery that reduces average costs
• What are diseconomies of scale?

  Factors that lead to an increase in average costs as a business grows beyond a certain size
• How does poor communication affect large businesses?

  It can lead to inaccuracies and slow message delivery, increasing costs
• What is the impact of low morale in large businesses?

  Workers may feel unimportant, leading to inefficiency and higher costs
• Why does slow decision-making occur in large businesses?

  Longer chains of command slow down communication and decision-making
• What is the break-even level of output?

  The output at which total revenue equals total costs
• What are the advantages of break-even charts?

  They help managers find profit or loss at each output level
• How can managers use break-even charts to analyze costs?

  They can change costs and revenues and redraw the graph to see effects
• What is the margin of safety?

  The amount by which sales exceed the break-even point
• What are the limitations of break-even charts?

  They assume all produced units are sold and fixed costs remain constant
• Why might fixed costs not always be fixed?

  Production changes may require additional factories or machinery
• How do break-even charts assume costs behave?

  They assume costs can always be represented with straight lines
• How can break-even be calculated without a chart?

  Break-even level of production = Total fixed costs / Contribution per unit
• What is the formula for contribution?

  Contribution = Selling price - Variable cost per unit