demergers and business objectives

Question 1

what is a demerger?

Answer 1

a demerger is when a firm decides to split into separate firms

Question 2

what are the reasons for a demerger?

Answer 2

• focusing on core businesses to cut costs
  improve profit margins + returns to shareholders
• reduce risk of diseconomies of scale
  by reducing range of functions in a business + achieve lower management costs
• raise money from asset sales + return it to shareholders who have equity in the business
• defensive tactic
  avoid the attention of competition of authorities who might be investigating market power
• may have conflicting aims + objectives
• production systems may not have been compatible
• corporate cultures may collide especially if its an international merger

Question 3

what is the impact of a demerger on businesses ?

Answer 3

• long term→ higher returns/ operating profits
• short term→ cost of selling off a part of their business
• difficult for smaller firm to maintain the position in the market it held before the merger
• profits can be reinvested
• business can focus on sore business or remove loss making sections in the firm

Question 4

what is the impact of a demerger on consumers?

Answer 4

impact on prices depends on the effect of a de merger on the intensity of industry competition

Question 5

what is the impact of a demerger on workers?

Answer 5

job losses if demerger is driven by a desire to control unit costs

But… new jobs may be created e.g from a successful management buyout

Question 6

what is the relationship between short run and long run average cost?

Answer 6

the LRAC curve envelopes the SRAC curve + is always equal to or below the SRAC curve

Question 7

draw the relationship between SRAC and LRAC on a graph?

Answer 7

Question 8

why does SRAC fall and then rise?

Answer 8

SRAC falls at first + then rises due to diminishing returns

Question 9

why is it not possible to move from A to C in the short run?

Answer 9

because certain factors of production are fixed

Question 10

how would you increase output if you’re producing at point A?

Answer 10

If producing at point A, to increase output, B is the only possible option in the short run

Question 11

what is SRAC impacted by?

Answer 11

impacted by productivity + law of diminishing returns

Question 12

what is LRAC impacted by?

Answer 12

impacted by internal economies + diseconomies of scale

Question 13

recall the key objectives of businesses?

Answer 13

revenue maximisation
profit maximisation
sales maximisation
profit satisficing

Question 14

what is revenue maximisation?

Answer 14

seeking to make the highest possible revenue
MR=0

Question 15

what does it mean if MR=0?

Answer 15

revenue is maximised

Question 16

what does it mean if MR=MC?

Answer 16

profit maximisation

Question 17

what is sales maximisation?

Answer 17

selling the highest number of products that they can without making a loss

Question 18

what does it mean if MR=MC

Answer 18

profit maximisation

Question 19

what is profit satisficing?

Answer 19

company make enough profit to satisfy the influencers e.g shareholders , workers

Question 20

draw a cost/revenue diagram and identify all of the points of maximisation?

Answer 20

Question 21

why may a firm want to profit maximise

Answer 21

• to reinvest into e.g R+D, innovation
• to pay dividends (a share of the profit) for shareholders to reward them as shareholders pay into the business
• lower costs and lower prices for consumers
• reward entrepreneurship as a reward as entrepreneurship is risky

Question 22

why may firms not profit maximise

Answer 22

they dont know where their MC=MR as its difficult to measure
avoid scrutiny from the CMA as they make think its dodgy e.g CMA may think that firms are cutting corners to cut their costs
key stakeholders could be harmed
other objectives may be more appropriate

Question 23

why may firms profit satisfice

Answer 23

stakeholders may be harmed if firms are profit maximising e.g
consumers may have to pay higher prices so that firms can make more profit
workers wages may be reduced to cut costs for firms
if cost cutting harms the environment then environmentalists wont be happy

Question 24

why may a firm revenue maximise

Answer 24

for economies of scale benefit -> greater growth, lower AC, maybe lower prices
to predatory pricing-> revenue max price is lower than profit max price to drive out competitors
principle agent problem- agents may use rev max to use as justification for perks in the job

Question 25

why may a firm sales maximise

Answer 25

economies of scale
this price is at the limit pricing-> to limit competition
principle agent problem -> to gain benefits from their job
flood the market- to develop brand loyalty so that they can then change their objective to e.g profit or rev maximise

Question 26

what other business objectives may there be

Answer 26

survival-> short term objective to develop brand loyalty and make people aware of their product or during a recession
public sector organisations-> they want to maximise society welfare and produce where demand equal supply (P=MC) which is the allocatively efficient point
corporate social responsibility -> ethics are important

Question 27

what point does profit satisficing occur

Answer 27

any point between profit max and sales max