Added Value in Business

Definition of Added Value

• Added Value: The enhancement a company gives its product or service before offering the product to customers.

  • Occurs during the production process, where raw materials are transformed into finished goods.

  • Calculation:

    • Added Value = Selling Price - Cost of Raw Materials

Example of Added Value

• Carpenter Example:

  • Inputs (Raw Materials):

    • Wood: £20

    • Brackets: £2

    • Screws: £0.50

    • Paint: £1

    • Varnish: £0.50

  • Total Cost of Raw Materials: £24

  • Selling Price (Finished Table): £104

  • Added Value Calculation:

    • £104 (Selling Price) - £24 (Cost) = £80 Added Value

• Important Note: Added value is not the same as profit.

  • Profit = Added Value - Wages and Overheads.

Added Value in Services

• Added value is applicable not only to goods but also to services.

• Wholesale Example:

  • A wholesaler buying and selling tins of baked beans.

  • The price difference between purchase and sale contributes to added value.

Strategies to Increase Added Value

1. Purchasing Cheaper Raw Materials:

   • Must ensure quality is not compromised.

   • Economies of scale in larger businesses can enhance added value.

2. Improving Production Efficiency:

   • Invest in modern machinery.

   • Train workforce for better efficiency.

3. Raising Product Prices:

   • Needs to consider price elasticity of demand; increasing prices can lead to decreased demand and revenue.

4. Brand Status Creation:

   • Establishing a strong brand (e.g., Chanel) allows charging premium prices, despite similar production processes.

5. Offering Additional Services:

   • Examples: Technical support helplines, installation services, and environment-friendly disposal.

6. Enhancing Customer Convenience:

   • Examples: Drive-through services, home-delivery options.

Discussion Points

• Difference Between Value Added and Profit

• Calculation Method of Added Value

• Methods Businesses Use to Add Value