CH22: Moving Averages

Question 1

Definition: moving averages

Answer 1

A method to reduce irregularities and smooth out the dispersion caused by variations, and highlight long term trend.

Question 2

What are the two methods of calculating moving averages?

Answer 2

Three point moving average - work out the moving average
Four point moving average (note. you need to work out the moving average then the moving average trend so that it is aligned to a specific quarter)

note. averages are aligned to a particular quarter

Question 3

Why is a four point moving average more effective at reducing irregularities/smoothening out dispersions than a three point moving average (i.e. when looking at sales in the year)

Answer 3

Sales in a business are more likely to vary every year, or over 4 quarters vs. 3 quarters. Hence using a 4 period average got get a smoother line.

Question 4

How do you calculate/what models do you use to work out the seasonal variations via moving averages?

Answer 4

1)Additive model
or
2)Multiplicative model

Question 5

What is the formula for the seasonal variation using the Additive model?

Answer 5

Seasonal variation = Actual value - Moving average (trend)

Question 6

What is the formula for the seasonal variation using the Multiplicative model?

Answer 6

Multiplicative model Seasonal variation =
( Actual figure-moving average trend/moving average trend )

or percentage change/proportion of the actual value vs. moving average trend
(Actual/moving average trend) - 1

Question 7

What does the multiplicative model show in terms of seasonal variation?

Answer 7

It shows the seasonal variation as a % of the moving average trend

Question 8

What are examples of Internal Diseconomies of Scale?

Answer 8

As the company grows….

1. Poor communication
2. Motivation - conflict could arise between departments, and employees may have less task ownership
3. Duplication of tasks
4. Co-ordination - departments need to be able to work well together
5. Principal-agent problem - inefficiencies caused by added layers of management are put in place who may have different objectives vs. owners
6. Admin costs - may require additional admin systems or personnel
7. Technical - when costs of maintaining equipment/machinery exceeds the benefits of increasing capacity

Question 9

What are examples of external diseconomies of scale?

Answer 9

As the industry or economy grows:

1. Natural resources - competition for raw materials increases - shortages and increased prices of resources
2. Wages - competition for skilled labour increases wage cost
3. Congestion - increased costs in terms of delays or missed deadlines due to congestion

Question 10

What 3 things do management need to consider to work out the optimum size of the organisation?

Answer 10

1. What economies and diseconomies of scale are
2. That they exists in their industry
3. The impact of economies and diseconomies of scale on costs

Question 11

What are positive outcomes of economies of scale on an organisation?

Answer 11

Lower costs

Lower prices due to lower costs (customers benefit from this too if the business decided to pass the benefit on to them)

A competitive advantage due to lower costs

Increased profits due to a competitive advantage

Question 12

Wha are negative outcomes of economies of scale on an organisation?

Answer 12

Barrier to entry for smaller firms

Reduced competition due to barriers to entry

Higher prices due to reduced competition