4.4 Costs, Scale of Production and Break-even Analysis | IGCSE Business

Success criteria - by the end of this topic you can:

classify and calculate fixed, variable, total and average costs
explain economies and diseconomies of scale
calculate break-even output and margin of safety
complete, interpret and use a break-even chart, and explain its limitations

Key terms
Fixed costs - costs that do not change with output in the short run, e.g. rent.
Variable costs - costs that change directly with output, e.g. raw materials.
Total cost - fixed costs + total variable costs.
Average cost - total cost divided by the number of units produced.

Worked example: Costs

Fixed costs $20 000; variable cost $0.60 per bar; 50 000 bars.
Total variable cost = 0.60 x 50 000 = $30 000. Total cost = 20 000 + 30 000 = $50 000.
Average cost = 50 000 / 50 000 = $1.00 per bar.

Using cost data to decide: which product to make, whether to continue or stop production, what price to set, which supplier to choose.

Economies of scale (average costs fall as a business grows)

Type	Reason
Purchasing	Bulk-buying discounts
Marketing	Advertising costs spread over more sales
Financial	Large firms borrow more cheaply
Managerial	Can employ specialist managers
Technical	Can afford advanced machinery and flow production

Diseconomies of scale (average costs rise when a business becomes too large): poor communication, lack of commitment from employees, weak coordination, lack of control.

🔒 Also in the full notes

Break-even analysis
Worked example
Common mistakes that lose marks
Exam tips and analysis chains
Check your understanding questions

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Case Study 1 (Paper 1 style, 20 marks): Questions · Mark scheme 🔒 · A* answers 🔒

Case Study 2 (Paper 2 style, 20 marks): Questions · Mark scheme 🔒 · A* answers 🔒