Senior 5: Costs

Costs: any expenditure made in order to produce during a period of time

Direct cost (DC): costs that could be associated, identified, allocated straight with each unit of a product

Indirect cost (IC): costs that cannot be associated with any specific product

Fixed cost (FC): any costs regardless the production level (Q)

Variable cost (VC): all costs that vary together with the output (Q)

Total Cost: VC + FC = DC + IC

Marginal cost: the extra cost because of producing an extra unit of production

Total revenue (TR): the income of a business in a period of time because of the sales of the output

Margin of safety: the amount of production by which the sales level exceeds the break even output.

Full Capacity: maximum level of production for the level of fixed capital installed.

Break-even point: is a combination of an output and total revenue from which the company will start having profits.

Break-even output: The level of output at which Total costs =Total revenue.

Break-even chart: This is a graph which shows the costs and revenue of a business and the level of sales that must be made to break even.

break even chart

vc linearLinear VC: whenever the production increases the VC will increase but at a same rate (not realistic)

Ctvc More realistic VC: when the production increases at the beginning the costs will increase but each time a bit less up to a point in which the efficiency of the fixed capital will be maximum and with each new unit of production the marginal cost will increase each time a bit more.

A more realistic version of the break even chart:


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