Costs, scale of production and break-even
| English | Chinese | Pinyin |
|---|---|---|
| total cost | 总成本 | zǒng chéng běn |
| fixed costs | 固定成本 | gù dìng chéng běn |
| variable costs | 可变成本 | kě biàn chéng běn |
| economies of scale | 规模经济 | guī mó jīng jì |
| average cost | 平均成本 | píng jūn chéng běn |
| contribution | 贡献 | gòng xiàn |
| break-even output | 盈亏平衡产量 | yíng kuī píng héng chǎn liàng |
| margin of safety | 安全边际 | ān quán biān jì |
Costs, scale and the break-even point
- Before a business can price its product or judge profit, it must understand its costs.
- A key tool is the break-even point — the sales level where the business stops making a loss.
Which is a fixed cost?
Rent does not change with output — a fixed cost.
Fixed, variable and total costs 总成本
- Fixed costs 固定成本 don't change with output: rent, salaries.
- Variable costs 可变成本 rise with output: materials, power.
- Total cost = fixed + variable. Larger scale can bring economies of scale 规模经济 (lower average cost 平均成本).
Fixed, variable and total cost as output rises
Break-even
Break-even is where total revenue crosses total cost.
Selling price is 12 and variable cost per unit is 8. What is the contribution per unit?
Contribution = 12 − 8 = 4.
Fixed costs are 1,600 and contribution per unit is 4. What is the break-even output (units)?
Break-even = 1,600 ÷ 4 = 400 units.
At the break-even point, the business makes:
Revenue exactly equals total cost.
Contribution 贡献 and break-even
- Contribution per unit = selling price − variable cost per unit.
- Break-even output 盈亏平衡产量 = fixed costs ÷ contribution per unit. At this point, revenue = total cost.
Below break-even the business makes a loss; above it, a profit.
Actual output minus break-even output is the margin of ______.
It shows how far sales can fall before a loss.
Margin of safety 安全边际
- Margin of safety = actual output − break-even output.
- It shows how far sales can fall before the business makes a loss.
Worked example. Price 10, variable cost 6 → contribution = 4. Fixed costs 2,000 → break-even = 2,000 ÷ 4 = 500 units. Selling 700 gives a margin of safety of 200 units.
The break-even point is where total revenue equals total cost
You've got it
- total cost = fixed + variable; larger scale can lower average cost
- contribution = price − variable cost per unit; break-even = fixed costs ÷ contribution
- margin of safety = actual − break-even output