3.1.4 Production, costs, revenue and profit

Business Objective

A goal that a business wants to achieve

Will vary from one business to another

Business objectives: Profit

• want to maximise profit

• to achieve the highest possible revenue

• can be done by increasing revenue

Business objectives: Survival

• the ability for a business to continue to exist

• need enough money to pay expenses

Business objectives: Sales Growth

• to expand - may be through more customers

• more sales or branches

• growth may be domestic (ie. within one country) or international (ie. moving into other countries)

Business objectives: Increased market share

want to take over more sales from competitors

market share = sales/total sales x 100

Business objectives: Social objectives

business may provide a social purpose, eg. a restaurant set up to help vulnerable young people

Profit =

Revenue - Cost

To increase Profit…

Increase Revenue

Or Decrease Costs

Costs

the expenses incurred by a business- the money that goes out of the business to pay for goods and services

Fixed costs

any costs that DO NOT change or vary with output

eg. rent (can change, but not due to the production of the firm)

Variable costs

any costs that DO change or vary with output

eg. a restaurant needs to buy more raw ingredients if they want to sell more meals

Total costs

The sum of of all the costs for a business

(total fixed costs + total variable costs = total costs)

Average costs

the per unit costs of production

average costs = total costs/total output (number of units produced)

Revenue

the income that s form receives from the sale of a good or service to its customers; in other words, the money coming into the business

Total revenue

the sum of all revenue generated by the sale of goods and services

Average revenue

Is a salary a fixed or variable cost?

Fixed cost

a salary is a contract, therefore a fixed cost

Is a wage a fixed or variable cost?

Variable cost

a wage is per hour, therefore a variable cost

Profit

the difference between costs and revenue

Profit =

total revenue - total costs

Lowering price is sometimes the only way to do what?

boost sales, therefore increase revenue

Production

refers to the total amount produced by a business in a given time period

Productivity

refers to the level of efficiency during production, or “output per input per period of time”. The input is usually workers, but can be any factor of production.

Efficiency

making the best possible use of resources

Production, productivity & efficiency =

output / input

output - the amount produced in a given time

input - the factor of production producing/providing the good or service

Factors impacting productivity: More advanced capital machinery

enables more to be produced at a lower cost and at a greater speed and accuracy

Factors impacting productivity: Better & increased quantity of the training of workers

workers will be more effective if they have a better education & training

division of labour/specialised workers - produce more

Factors impacting productivity: improved morale + worker motivation

may be more motivated if workers are paid according to performance, however this may increase

Factors impacting productivity: More competitive markets

Increased competition = incentives to cut prices & increase productivity

Factors impacting productivity: increased capital/more effective management

increased productivity

Benefits of increased productivity: Increased output

higher sales = higher profits = ability to invest in G&S

eg. research & development

Benefits of increased productivity: Lower costs

allows for firms to become more competitive due to higher efficiency = more sales = more profits.

Increased economies of scale.

Benefits of increased productivity: Lower prices for customers

Lower costs (through increased productivity) = reduction in price = allows firms to become more competitive = increased profits

Benefits of increased productivity: higher wages for workers

increased motivation

Economies of scale (EOS)

when an increase in a firm’s output results in a fall in average costs

(as a firm produces more, they’re able to reduce the average cost of production per unit)

2 types of EOS

Internal EOS

occur as a single form grows

are controlled by the company

External EOS

occur within the industry

all participating firms benefit

e.g. local roads improved, so local transport costs for local industries may fall

Types of EOS: Technical

large scale machinery will cost more but can operate much faster & cuts average unit cost

Types of EOS: Managerial

Employment of specialist managers streamline operations and reduce unit costs

Types of EOS: Financial

Easier/Cheaper to borrow money (larger firms can take advantage of lower interest rates)

Types of EOS: Risk-bearing

Range of products & markets - diversify. Bigger firms are more able to survive downturns

Types of EOS: Purchasing

Bulk-buying - Larger orders, lower unit cost

Diseconomies of scale

may arise from growth and increasing output, resulting in average (unit) cost increasing

Diseconomies of scale can be as a result of…

Loss of control

as a firm becomes larger, it is physically harder to monitor, supervise and coordinate each worker

Diseconomies of scale can be as a result of…

Poor communication

• As the firm expands, workers may become alienated & isolated, leading to decreased productivity and increased average costs

• May lead to inefficiency

• More bigger branches = more levels to communicate through

Diseconomies of scale can be as a result of…

Reduced worker motivation

• may not see the results of their work

• division of labour - repetitive tasks

• may feel less important within a business

• decreased productivity and increased average costs

Benefits of growth for a firm

• can take advantage of EOS

• costs can reduce

• increase in resources

• increased market share

• ability to attract now customers

• easier to influence market price

• greater financial viability

• can become price setters

• possible to increase profits

Costs of growth for a firm

• diseconomies of scale

• larger businesses are more complex

• Cash shortages may occur

• Quality of some items may be compromised due to increased production levels

• controlling aspects of the business may become difficult

• staff may become demotivated

• possible environmental impacts (eg. pollution)