Operations

Question 1

Fixed costs

Answer 1

costs that do not vary with output (also known as overheads)

Question 2

Variable costs

Answer 2

costs that vary directly with output (also known as direct costs)

Question 3

Direct costs

Answer 3

costs that can be attributed to a specific activity or the production of a particular product

Question 4

Overheads

Answer 4

or indirect costs, are the day-to-day running costs of an organisation

Question 5

Average cost

Answer 5

the cost of producing each unit of output

Question 6

Profit margin

Answer 6

the difference between the selling price per unit and the average cost per unit

Question 7

Break even level of output

Answer 7

the minimum level of output a business will need to produce and sell to cover its costs

Question 8

Break even analysis

Answer 8

using cost and revenue data to calculate the break-even level of output

Question 9

Economies of scale

Answer 9

a fall in the average cost of producing each unit due to an increase in the scale of production

Question 10

Diseconomies of scale

Answer 10

rising average costs due to a business being too big to operate efficiently

Question 11

Profit=

Answer 11

Total revenue – Total costs

Question 12

Profit per unit =

Answer 12

Selling price per unit – Average cost per unit

Question 13

Total fixed costs=

Answer 13

Sum of all fixed costs

Question 14

Total variable costs=

Answer 14

Variable cost per unit x total output

Question 15

Total costs =

Answer 15

Total fixed costs + Total variable costs

Question 16

Average cost per unit=

Answer 16

Total cost / Total output

Question 17

How do you calculate break even level of output in units?

Answer 17

Total fixed cost/(Selling price per unit - Variable cost per unit)

Question 18

What are the limitations of break-even analysis?

Answer 18

Products are not sold at the same price at different levels of output. As output increases, price will have to decrease (thus decreasing profit margin), to persuade customers to buy additional output.
Fixed costs DO vary when output changes e.g. moving to larger premises
Businesses are unlikely to sell everything that they produce. There may be some build up of inventory or wasted output
Most businesses sell more than one product
Variable costs do not always stay the same. They get cheaper as output rises (due to buyer power increasing i.e. being able to buy more from suppliers at cheaper prices)
Overheads that are spread across different products – will be hard to allocate costs specifically to each product e.g. premises

Question 19

What are the economies of scale?

Answer 19

Economies of scale reduce the average cost of producing each unit of output as the scale of production is expanded in a business. 5 main types:
Purchasing economies: Being able to get price discounts for buying in bulk because of the large scale of production. It is easier for the supplier to make one large delivery than to make several small deliveries.
Marketing economies: E.g. fixed costs of advertising in a newspaper or on TV will be spread over a much larger output in a large firm than in a small firm.
Risk bearing economies: Large companies can sell to national markets and international markets, reducing risk.
Technical economies: Large businesses have the resources to invest in specialised machinery and highly skilled labour for R&D.
Financial economies: Large businesses can often borrow more money and at lower interest rates than small businesses. They can also sell shares to raise permanent capital that never has to be repaid.

Question 20

What are the diseconomies of scale?

Answer 20

Management diseconomies: Several layers of hierarchy or communication problems due to spans of control being too long; can affect decision making and will mean decisions take longer to be acted upon.
Labour diseconomies: Large firms using specialised machinery will require specialised workers to perform repetitive tasks. This can reduce motivation and thus productivity.

Question 21

Production

Answer 21

using resources to provide goods and services to satisfy consumer needs and wants

Question 22

Productivity

Answer 22

a measure of the efficiency of use of resources in a business by comparing the volume or value of output with the resource inputs used in production

Question 23

Labour productivity

Answer 23

average output or revenue per employee

Question 24

Lean production

Answer 24

Improving efficiency and eliminating waste in a production process so that products can be made better cheaper and faster

Question 25

Inventories

Answer 25

stocks of materials, work-in-progress and finished goods stored by a business. Keeping inventory on hand helps to ensure uninterrupted production and helps to meet peaks in consumer demand

Question 26

Just-in-time (JIT) inventory control

Answer 26

keeping inventories of materials and work-in-progress to a minimum by taking delivery of new parts and materials only when they are needed for production

Question 27

Kaizen

Answer 27

the continuous improvement of production processes to remove waste and increase efficiency

Question 28

Job production

Answer 28

the production of a single item or items made to order, usually involving labour intensive techniques

Question 29

Flow production

Answer 29

mass production of a large number of identical items in a continuous, usually automated process

Question 30

Batch production

Answer 30

production of a limited number of identical products to meet a specific requirement or customer order. Each new batch may be slightly different from the last one produced

Question 31

Computer-aided-design (CAD)

Answer 31

the use of computer systems to create, modify and optimise the design of a product

Question 32

Computer-aided-manufacturing (CAM)

Answer 32

the use of computers to control and monitor the use of machinery and equipment in a manufacturing process

Question 33

Research and development

Answer 33

improving existing products and the discovery, testing and development of new products, materials or production processes, to gain a competitive advantage or to increase social welfare

Question 34

Disruptive technologies

Answer 34

new products, materials or processes that completely change the way businesses produce and operate or completely change what consumers want and buy

Question 35

Technological spillovers

Answer 35

the application of a new technology developed in one sector to the products and production processes of other industrial sectors

Question 36

Factor substitution

Answer 36

replacing one factor of production with another in a production process. For example advanced capital equipment has replaced labour in many modern production processes