Profitability 20 Mark Answers

Question 1

How does increasing quantity sold affect profitability?

Answer 1

• Higher sales volume = higher sales
• makes better use of production capacity
• may result in higher market shore
  EVAL:
• depends on PED
• sales value may fall if price has to be reduced to achieve higher Sv
• does the business have capacity to produce more
  Eval:
• competitors are likely to respond
• marketing efforts may fail
• FC may rise

Question 2

How does Increasing Selling price affect profitability?

Answer 2

• Higher selling price → higher sales
• maximises value extracted from customers
• perceived is higher quality
• no need for extra production capacity
  Eval:
• PED
• only works if customer remain loyal
• competitors are likely to respond
• customers may switch

Question 3

How does reducing variable costs affect profitability?

Answer 3

• Increase value addled
• higher profit margin
• customers don’t notice price change
  EVAL:
• only is suppliers can provide lower prices
• only if Q is improved through less wastage
• may mean lower Q inputs → greater wastage

Question 4

How does increasing Production output affect profitability?

Answer 4

• Greater quantity of product sold.
• Enables business to Maximise share of market
• spreads FC over a greater output
  EVAL:
• can the extra output be sold
• is there spare cap
• is there demand for more products
• production Q may be lowered due to rush

Question 5

How does reducing Fixed costs affect profitability? Fixed

Answer 5

• Reduces BE output
• cuts unnecessary overheads
  EVAL:
• costs cut can’t affect Q, customer service or output
• might reduce ability to increase sales
• intangible costs → lower morale through redundancies