operations management

fixed costs

costs which do not vary in the short run with the number of items sold or produced.

variable costs

costs which vary directly with the number of items sold or produced.

why a manager needs to think about costs

• the costs of the operating factory can be compared with the revenue from sales. This can help calculate wether the business will make profit or loss.

• the costs of two different locations for the new location can be compared. this will help the owner make the best decision.

• to help the manager decide what price should be charged for the good or the service

average cost formula

= total cost ÷ output

total cost formula

= fixed cost ÷ variable costs

total costs

fixed costs and variable costs combined

average costs per unit

the total cost of production divided by total output.

how data from costs can be used to set prices

the average cost can be used to charge the price that will avoid losses being made on each item sold

economies of scale

the factors that lead to a reduction in average costs as a business as a business increases in size

diseconomies of scale

the factors that lead to an increase in average costs as a business grows beyond a certain size

five economies of scale

1. purchasing economies

2. marketing economies

3. financial economies

4. managerial economies

5. technical economies

three diseconomies of scale

1. poor communication

2. lack of commitment form employees

3. weak coordination

poor communication as a diseconomy of scale

if there is slow or inaccurate communication then serious mistakes can occur which lead to lower efficiency and higher average costs.

lack of commitment as a diseconomy of scale

workers may feel that they are unimportant and not valued by the management. The lack of these relationships in a large business can lead to a lack of commitment and lead to lower efficiency and higher average costs.

weak coordination as a diseconomy of scale

quality

producing a good or service which meets customer expectations

how quality products help businesses

• establishes a brand image

• builds brand loyalty

• maintains a good reputation

• increases sales

• attracts new customers

what happens when quality is not maintained

• lose customers to other brands

• have to replace faulty products or offer to repeat a service that was poor, this raises costs

• will lead to customers telling other people about their experience and this will create a bad reputation, leading to lower sales and profits.

quality control

the checking for quality at the end of the production process, whether it is the production of a product or a service. It uses quality inspectors as a way of finding any faults.

advantages of quality control

• tries to eliminate faults or errors before the customer receives the product or service

• less training is required for the workers as inspectors are employed to check quality

disadvantages of quality control

• expensive as inspectors need to be paid to check the product or service

• identifies faulty products but doesn’t find why the fault has occurred and therefore is difficult to solve the problem

• high costs if products have to be scrapped or reworked or service repeated.