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  • Created by: Natasha
  • Created on: 11-04-13 11:36

Choosing the scale of production

Number of factors that will help determine the size of a business.

  • Size of the market
  • The amount of capital needed
  • Economies and Diseconomies of scale( they will benefit from these if they choose a large scale of production)
  • The motives of the owners
  • Co-Opeation by firms
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Break Even

A business breaks even when its cost of production are equal to its sales revenue. This means the business does make profit nor loss. 

To work this out: 

Break even= Total fixed costs/ Selling price-Variable cost

A margin of safety is: The amount by which a business' actual output is greater than its break even output

To work this out:

Margin of safety= Actual sales - Break even sales. 

Limitations of Break even analysis

  • Forecast figures may turn out different
  • Figures usually relate to one product
  • Only applies if all products are sold. 
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Need to:

  • Start up 
  • Grow in size
  • Buy new machinery and matertials
  • Help the day to day running of the business.

Internal: Finance thats comes from within the business( Short term: Cash in bank, Long term: Retained Profit)

External: Finance thats comes from outside the business (Bank loans, Grants etc.)

Could sell shares but Sole traders and partnerships cannot do this.

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