Points for profitability Flashcards
why would a business increase the quantity sold?
-higher sales volume = higher sales
(assuming the selling price isn’t lowered)
-makes better use of production capacity
(fixed costs should not rise)
-may result in higher market share
will increasing quantity sold work?
-depends on PED
-sales value may actually fall if price has to be reduced to achieve higher sales volume
-does the business has the capacity to sell more?
why might increasing quantity sold not work?
-competitors are likely to respond
-marketing efforts may fail
(promotional campaign does not generate results)
-fixed costs might actually rise
(higher marketing)
why would a business increase its selling price?
-higher selling price = higher sales
(assuming quantity sold doesn’t fall in response)
-maximises value extracted from customers
-customers may perceive product as higher quality
-no need for extra production capacity
will increasing selling price work?
-depends on PED
-sales value may actually fall if price rise is matched by an even bigger fall in quantity sold
-it will work if customers remain loyal and still perceive product to be good value
why might increasing selling price not work?
-competitors are likely to respond
(prices lower)
-customers may decide to switch to competitors
why would a business reduce its variable costs per unit?
-increases the value added per unit sold
-higher profit margin on each item produced and sold
-customers don’t notice a change in price
will reducing variable costs per unit work?
-yes, if suppliers can be persuaded to offer better prices
-yes, if quality can be improved through lower wastage
-yes, if operations can be organised more efficiently
why might reducing variable costs per unit not work?
-lower input costs might mean lower quality inputs -> can lead to greater wastage
-customers may notice a decrease in product quality
why would a business reduce its fixed costs?
-a drop in fixed costs translates directly into higher profits
-reduces the break even output
-substantial savings to be made by cutting unnecessary overheads
will reducing fixed costs work?
-yes, provided costs cut don’t affect quality, customer service or output
-a business can nearly always find savings in overheads
why might reducing fixed costs not work?
-might reduce ability of business to increase sales
-intangible costs
(lower morale after making redundancies)
why would a business increase its production output?
-provides greater quantity of product to be sold
-enables business to maximise share of market demand
-spreads fixed costs over a greater number of units
will increasing production output work?
-yes, if the extra output can be sold
(finding a new market, offering a lower price for a more basic product)
-yes, if the business has spare capacity
why might increasing production output not work?
-a dangerous option
(what if there’s lack of demand?)
-fixed costs might actually rise
(stepped fixed costs)
-production quality might be compromised (lowered) in the rush to produce more
why would a business reduce its product range?
-too many products = complex operations & inefficiency
-some products may be very low margin or even loss making
why would a business outsource non-essential functions?
-a way of reducing fixed costs
-focus the business on what it is good at
-areas to outsource:
(IT, call handling, finance)
