Quiz Flashcards
Choosing the scale of production
Number of factors that will help determine the size of a business.
• Size of the market • The amount of capital needed • Economies and Diseconomies of scale( they will benefit from these if they choose a large scale of production) • The motives of the owners • Co-Opeation by firms
Break Even
A business breaks even when its cost of production are equal to its sales revenue. This means the business does make profit nor loss.
To work this out:
Break even= Total fixed costs/ Selling price-Variable cost
A margin of safety is: The amount by which a business’ actual output is greater than its break even output
To work this out:
Margin of safety= Actual sales - Break even sales.
Limitations of Break even analysis
• Forecast figures may turn out different • Figures usually relate to one product • Only applies if all products are sold
Process Production
Involves a series of automated processes, applied to a variety of raw materials.
Advantages
• Large amounts can be made • Most processes can automated to allow production costs to be kept low • Ideally suited to products that need to be consistent
Disadvantages
• Very expensive to set up the process • A problem with one part of production process stops the whole process.
Finance
Need to:
• Start up • Grow in size • Buy new machinery and matertials • Help the day to day running of the business.
Internal: Finance thats comes from within the business( Short term: Cash in bank, Long term: Retained Profit)
External: Finance thats comes from outside the business (Bank loans, Grants etc.)
Could sell shares but Sole traders and partnerships cannot do this.
Sales Revenue
This is the money the business receives for selling the good or services it produces.
To calculate:
Sale rev= Quantity sold x selling price
To increase sales revenue, you need to change the price or increase the amount you sell.
Raising the price may increase revenue but people may be more put off as it is now more expensive so you could lose sales revenue.
Factors affecting sales
• The number of competitors • What competitors do • Wheter the product is a necessicity • How much people spend on your product.
To increase amount sold: Increase advestising, sell in greater number of outlets, or increase its product range.
Lean production
JIT
Its a japanese approach to management in which they cut waste by not keeping large stocks so make the business more efficient.
An main example of this is Just In Time (JIT) production
This is when no large amount of stocks are kept they just gave the products delievered in when they need them.
Advantages
• May improve quality as the whole production line will need to be high quality for it to run smoothly.
Disadvantages
• If poor quality goods are sold, called “seconmds”. The producer will reduce the price so will lose sales revenue • Customer will not be happy to receive poor quality goods. • Production may be interupted if production at a earlier stage is not good enough for final stages
Business Costs
Cost are the payments a business makes.
Fixed
Costs that do not change no matter how much is sold. Such as rent or mortgage.
Variable
A cost that changes depending on the amount.
Total variable costs= quantity sold x variable cost per unit
Total cost.
Fixed cost+Variable cost= Total Cost
Average cost
The average cost of production is the cost for each unit of product they sell
Average cost= Total cost/ Amount sold
Job Production
Producing each product individually
Advantages
• High quality • Made to meet the needs of individuals • Workers often get more satification from working on something until it is finished
Disadvantages
• Cost of production will be high • Labour cost may be high because job production requires skilled workers.
Techinical:
A business saves on production costs by using better methods and equipment
Managerial:
A busines can employ specialist managers who improve efficiency.
Financial:
A business does not have to pay out as much money to raise finance.
Risk-bearing:
Has a range of products or services so is not dependant on just one product
Purchasing:
A business is given a discount for buying in large quantities.
Marketing:
Business saves on advertising and transport costs.
Diseconomies of scale
Diseconomies of scale usually occur because the firm become too big to be managed efficiently.
What affects profit or loss?
• The type and size of business (Is it a necessity? Do you have many outlets?) • The objectives( some aim to earn profit but charties dont) • The demand for product ( Some are necessities whereas some are just trends) • The price consumers are willing to pay ( People will pay more for designer stuff) • Business controls its costs (Pay workers low wage? Using cheaper raw materials?) • The amout of competition ( Too much competition will lose you profit) • The cost of setting up a business ( Made need to take up a loan or may find it hard to break into the market so will be in debt before start making profit)
(profit can be seen as a return of investment as still have to pay dividends to shareholders or loans back to banks.)
Types Of Profit
Gross profit
Net profit
Gross profit
Gross profit before any deductions:
selling price-buying price=gross profit
Profit margin
Profit margin= Gross profit/Buying price x 100
Net profit
is after all deductions
Net profit= Gross Profit- Total costs
