1.2: Economies of Scale

Question 1

What are Economies of Scale

Answer 1

The reduction in average cost per unit

Question 2

The First type of Economies of Scale is Internal Economies. What are they?

Answer 2

Bulk-Buying (Purchasing), Financial, Technical, Marketing, Managerial and Risk-Bearing

Question 3

How are Technical Economies achieved

Answer 3

To grow a business will increase production by making greater use of capital equipment so more can be produced with less waste and greater efficiency

Question 4

How are Marketing Economies achieved

Answer 4

An increased scale of production means that marketing costs are now spread over more units therefore reducing the average costs of marketing

Question 5

How are Managerial Economies achieved

Answer 5

As the business grows in size so the levels of hierarchy with in the business increase and they employ specialists in each field because they make far fewer mistakes

Question 6

How are Educational Economies achieved

Answer 6

Colleges assist with the development of a skilled labour force by offering skills-based courses and R&D capabilities

Question 7

How are Supplier Economies achieved

Answer 7

Suppliers will look to relocate themselves closer to the industry to reduce transport costs and responsiveness to use a Just-In-Time System

Question 8

How are Infrastructure Economies achieved

Answer 8

Improved road networks, better rail and port links, faster broadband services and improved telecommunications all of these lower the operating cost of the entire industry through increased levels of efficiency

Question 9

How do Co-Ordination Diseconomies occur

Answer 9

As the business grows different working practices are used over different locations meaning its difficult for management to monitor so mistakes start to occur which leads to a rise in the LRACs

Question 10

How do Communication Diseconomies occur

Answer 10

As the business grows hierarchy levels grow, this makes communication ineffective due to messages being lost which can lead to some staff not understanding their role such actions lead to low productivity levels and a rise in LRACs

Question 11

How do Motivational Diseconomies occur

Answer 11

The combination of Co-ordination and Communication leads to low productivity and production levels raising costs and making a firm less competitive with the market

Question 12

Are Diseconomies Inevitable

Answer 12

Their impact can be minimised by improving systems before hand

Question 13

What is the Public Sector

Answer 13

Businesses owned, financed, and controlled by the state such as The NHS, Armed Forces, and Education they are non-profit making and paid for by taxation

Question 14

Why is the Public Sector Important

Answer 14

Largest Employers in Europe, the govt spend over £800 billion / year , the largest being the NHS

Question 15

What is the difference between Public Goods and Merit Goods

Answer 15

Public: Necessities that dont generate profit like street lighting, forcers and the police
Merit: Something the govt thinks is good for us that we should all have whether we can afford it or not

Question 16

To be a Public Good something has to be Non-Excludable and Non-Rival. What does this mean?

Answer 16

Non-excludable means individuals cannot be prevented from enjoying the benefits of a good or service.
Non-Rival means everyone can gain from the consumption of the good or service

Question 17

What are the 3 Public Sector Objectives

Answer 17

Provide a Quality Service, Provide Value for Money and Provide for Customer Needs

Question 18

State 3 Pros and Cons of the Public Sector

Answer 18

Pros: Job Creation, Provision of Key Goods/Services and Provides benefits for the whole population
Cons: Cost leads to higher taxes, maybe inefficient if little competition and Governments may have little business experience

Question 19

What is as Private Sector Organisation

Answer 19

Businesses owned, financed, and controlled by individuals

Question 20

State 4 Private Sector Objectives

Answer 20

Survival (30% fail), Sales Maximisation, Creation of Brand Loyalty and Social Objectives

Question 21

What is unlimited liability

Answer 21

A business that hasn’t become a company has unlimited liability so the owners are responsible for anything

Question 22

What is Limited Liability

Answer 22

The owners are only responsible for what they have invested in the business and their personal assets are not at risk

Question 23

What is a Sole Trader and What are the advantages and disadvantages

Answer 23

Owned by one owner, however, they face unlimited liability, but they are easy to set up, respond quickly, and hardly any paperwork, on the other hand, they have limited money, limited capital investment and a limited skills base

Question 24

What is a Partnership

Answer 24

Between 2 and 20 owners, they face unlimited liability unless they bring in a silent partner or they can become an LLP where each partner is responsible for their own debt (Shared Control and Arguments however Raise Capital and Wider Skills Base)

Question 25

What is a Private Limited Company (LTD)

Answer 25

incorporated business but has separate legal identity from owners they have to be part of the business, shares cannot be sold, they have limited liability and access to more capital however legal formalities and shares cannot be sold

Question 26

What is a Public Limited Company (PLC)

Answer 26

Incorporated business run by a board of directors and has an AGM, they have limited liability and Stock exchange however lots of admin work and shareholder pressures

Question 27

What is Divorce of Ownership and Control

Answer 27

When an owner doesn’t control day to day decisions, instead they are made by managers and directors

Question 28

State 3 factors affecting ownership type

Answer 28

Risk, Time and Financial Requirements

Question 29

What are the two main costs a business has to account for

Answer 29

Fixed Costs (Rent) + Variable Costs (Raw Materials) = Total Cost

Question 30

What are Semi-Variable Costs

Answer 30

Some have both a fixed and variable element such as a telephone

Question 31

What is the formula for calculating average cost

Answer 31

Total Cost / Quantity

Question 32

What is the difference between Direct and Indirect Costs

Answer 32

Direct costs arise from the production of a good or service whereas indirect costs are things such as advertising

Question 33

What is Sales revenue

Answer 33

Turnover doesn’t take into account costs
Quantity Sold X Selling Price

Question 34

What is Profit

Answer 34

Money after costs
Sales Revenue - Total Costs

Question 35

How does a business use and improve its profit

Answer 35

Distribute and Retain they can improve profit by reducing costs or selling more

Question 36

Why is Profit so important

Answer 36

Profitability of a good or service can enable decisions making so it won’t endanger the business if spotted in time and it allows for better budget allocation

Question 37

What is Break-Even

Answer 37

Point where total revenue is the same as total costs
Fixed Costs / Contribution Per Unit

Question 38

What is Contribution

Answer 38

A measure of how much each item sold contributes towards the fixed costs of the business
Selling Price - Variable Cost Per Unit

Question 39

What is the Margin of Safety

Answer 39

The difference between the level of output beyond break-even less the break even output

Question 40

What are the six possible changes to a break even chart

Answer 40

Increase to selling price (revenue), Decrease to selling price (revenue), Increase in Variable Cost/ Unit (VC), Decrease in Variable Cost/ Unit (VC), Increase in Fixed Costs (FC) and Decrease in Fixed Costs (FC)

Question 41

What are the 4 assumptions of Break Even

Answer 41

Selling price isnt affected by units sold, fixed costs remain the same, variable costs per unit are the same for every unit and that every unit produced is sold

Question 42

What are the Pros and Cons of Break Even Graphs

Answer 42

Pros: Quick and Simple, What if analysis and key element of a business plan’
Cons: Assumptions, Simplification of the real world and Ignores competitors actions

Question 43

State two internal sources of finance

Answer 43

Retained Profit: Profits from pervious year after tax and shareholder dividends
Sale of Fixed Assets: Idle assets can be a large sources of cash to fund new projects

Question 44

State another two internal sources of finance

Answer 44

More effective use of Working Capital: Cashing off debtors, selling stocks ang negotiating longer credit periods
Personal Finance: Start-ups take this route commonly

Question 45

State two external sources of finance

Answer 45

Factoring: Selling its debt to a factoring company who gives the business 80% immediately of what it’s owed
Sale and Leaseback: When a business sells any machinery on and leases them back from the purchaser to allows continued use of what has been sold

Question 46

State another two external sources of finance

Answer 46

Trade Credit: Obtaining goods from another business and paying for them at a later date when they have the money to pay
Hire Purchase: Use of assets in a return of a monthly fee over a set period of time where a set amount of money has to be repaid

Question 47

What are the 4 factors that determine source of finance

Answer 47

Availability, Cost, Risk and Control