Chapter 6

Question 1

5 Types of Cost

Answer 1

Fixed costs
Variable costs
Total costs
Marginal costs
Average costs

Question 2

What are fixed costs:

Answer 2

Costs that do not change with the level of output.
Eg: rent, salaries, insurance, advertising

Question 3

Variable costs:

Answer 3

Costs that vary according to output.
Eg: raw materials, direct labour costs.

Question 4

Total costs

Answer 4

= fixed costs + variable costs

In a graph, starts at the same level as fixed costs

Question 5

Marginal costs

Answer 5

The amount by which total costs change for each additional unit of output.

Formula:
Total cost of A+1 units -/- total cost of A units.

Question 6

Average costs formula

Answer 6

Total costs / number of units of production

Question 7

Advantages of outsourcing

Answer 7

1. Expertise: can improve quality and keep costs down
2. Know fee

Question 8

Disadvantages of outsourcing

Answer 8

1. Can lead to a lack of control
2. Unlikely to gain a competitive advantage
3. Dependent on an outside organisation: - possible price rises in the future
   - the outside organisation could fail or refuse to provide the service
4. Loss of internal expertise:
   - hard to bring expertise back in-house
   - no longer ??
5. The external organisation has less understanding of the business than the internal dept.
6. Loss of confidentiality

Question 9

Core competencies

Answer 9

• should never be outsourced; essential to competitive advantage

Question 10

Complementary competencies

Answer 10

• Only outsourced to an expert

Question 11

Residual competencies

Answer 11

• can be outsourced to anyone

Question 12

Structures of businessss

Answer 12

• network organisations
• virtual organisations

Question 13

What is a network organisation?

Answer 13

• Flexible
• Depends on relationships with other parties: - keep employed staff to a minimum.
  
  • outsource many activities to external providers
• the role of the organisation is to co-ordinate the outsourced activities
• tend to keep the key drivers of its ability to compete ‘in-house’
• relies on strategic alliances

Question 14

Virtual Organisation:

Answer 14

• Uses IT as the main communication tool between its employees
• staff can be located geographically dispersed locations

Question 15

Transaction Cost Theory =

Answer 15

Allows organisations to weigh up the two following actions:
- Employ people / hierarchy solutions
- Outsource / market solutions

Question 16

3 Costs in addition to the actual contract fee:

Answer 16

• Contract negotiation
• Supplier monitoring
• Legal costs of non-conformance to contract

Question 17

Types of Asset specificity

Answer 17

• an employee, with a particular skill set
• a building in a specific location
• piece of equipment, that is good for 1 specific purpose

The more specific an asset is, the higher the transaction cost will be

Question 18

Bounded rationality =

Answer 18

When making decisions people are confined by 3 constraints:
- limited capacity of the human mind
- limited amount of time
- limited amount of information available

There is a cost to making decision making errors.

Question 19

2 Alternatives to outsourcing

Answer 19

• Shared services organisations
• Flexible staffing

Question 20

Shared services organisation

Answer 20

Repeated services are put into one division which serves the organisation (eg. accounting, HR, IT).

• Avoids duplication
• Increases efficiency

Question 21

3 ways of Flexible staffing

Answer 21

• employment agencies (temporary through an agency)
• leased employees (long-term through an agency)
• contractors

Question 22

Benefits of flexible staffing

Answer 22

Potentially reduced costs from:
- only pay when staff is needed
- no direct recruitment costs
- no overtime rates for internal staff
- payroll performed elsewhere
- no long term staff development costs

Question 23

Negatives of flexible staffing

Answer 23

• less loyalty
• higher hourly rate