Page 221 - Cambridge IGCSE Business Studies

16: Costs, scale of production and break-even analysis

ACTIVITY 16.4

EasyAir is a budget airline operating internal flights in Tanzania. One of its most popular routes is Dar es Salaam to

Kilimanjaro. Each aircraft used on this route has a capacity for carrying 140 passengers. The average price for a one-way
ticket is $160. All passengers, adults and children, must pay the same ticket price. EasyAir’s fixed costs for a single journey
are $14,000. The variable cost per passenger is $10.
The number of flights and the passengers carried by EasyAir on this route during the first two quarters of 2013 is shown in
the table below.

Number of flights Total passengers carried
January–March 25 1,925

April–June 38 4,408

1 What is meant by ‘fixed costs’?
2 Calculate the average number of passengers per flight for the first quarter of 2013.
3 The average number of passengers carried on a flight in the second quarter was 116. Calculate:
a The total variable cost per flight.
b The total cost per flight.
c The average cost per passenger per flight.
4 The average cost of per passenger per flight in the first quarter was $191.82. Why does EasyAir continue flights when the
average cost per passenger is less than the revenue per passenger?

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Economies and diseconomies of scale

Economies of scale
The term ‘scale’ simply means the size of business operations – it is a measure of a

business’s output. As output grows, a business oft en benefits from reduced average

KEY TERM costs due to economies of scale. Businesses may benefit from different types of
economies of scale, as shown below.
Economies of scale: the
reduction in average costs as
a result of increasing the scale of
operations. Financial
economies

Technical Managerial
economies economies
Economies
of scale

Purchasing Marketing
economies economies

Figure 16.2 Different types of economies of scale