IGCSE Business Mock Exam Revision Guide PDF

Organizational Structure Chapter 7 Organisation structure refers to how responsibility and authority is shared in a business organisation. This is often displayed in the form of an organisational structure The 2 common type of organisational structures are...

Organizational Structure Chapter 7 Organisation structure refers to how responsibility and authority is shared in a business organisation. This is often displayed in the form of an organisational structure The 2 common type of organisational structures are Tall organisational charts – These have a long chain of command and a small span of control. Flat organisational charts – Short chain of command, wide span of control. Advantages of an organisational chart Shows how everybody is linked together in a business  Lines of communication are clear Motivational as employees can see where they belong and can plan their career paths Chain of Command The chain of command is the structure of an organization that allows instructions to be passed on from senior managers to lower levels of management. In the above figure, there is a short chain of command since there are only four levels of management shown. There is a link between the span of control and chain of command. The wider the span of control the shorter the chain of command since more people will appear horizontally aligned on the chart than vertically. A short span of control often leads to long chain of command. (If you don’t understand, try visualizing it on an organizational chart). Advantages of a short chain of command (these are also the disadvantages of a long chain of command): Communication is quicker and more accurate Top managers are less remote from lower employees, so employees will be more motivated and top managers can always stay in touch with the employees Spans of control will be wider; this means managers have more people to control This is beneficial because it will encourage them to delegate responsibility (give work to subordinates) and so the subordinates will be more motivated and feel trusted. However, there is the risk that managers may lose control over the tasks. Span of Control – The number of employees working directly under a manager. Levels of Hierarchy – Number of layers in an organisation structure Advantages of short chain of command Faster communication – Communication is quicker and more accurate since it is passed on by fewer people.  Stronger relationship between high-level managers and employees – This is because there are fewer levels between managers and employees. Each manager is responsible for more employees – This encourages them to delegate (pass down) more work to employees. De-layering – removing an entire row of management to cut down the cost and mostly its middle management. Centralised and Decentralised Decision Making 1. Centralized Decision-Making Definition: In a centralized structure, decision-making authority is concentrated at the top levels of the organization. The senior management or a small group of executives make the key decisions, and lower-level employees or departments have limited input. Features: Authority: Decisions are made by a few key individuals, typically in senior management or the board of directors. Consistency: Since decisions are made at the top, there is more consistency across the organization. The overall direction and policies are unified. Control: Top management has more control over the operations, ensuring that the company's strategies are implemented consistently. Communication: Communication tends to be top-down, where instructions and policies flow from the top to the bottom. Advantages: Clear direction: Easier to maintain a clear vision and strategy across the company. Consistency: Ensures uniform decisions and policies across all departments and locations. Efficiency: Decision-making can be faster because fewer people are involved in the process. Strong control: Senior management can have a strong grip on the company's direction and finances. Disadvantages: Lack of initiative: Lower-level employees may feel disempowered and may not be able to respond quickly to local issues or customer needs. Bureaucratic: Decision-making can be slow if the senior management is overburdened with decisions, and the process can become inflexible. Limited innovation: Since decision-making is concentrated, there may be fewer ideas and innovations coming from employees at lower levels. 2. Decentralized Decision-Making Definition: In a decentralized structure, decision-making authority is spread out to various levels of the organization, often empowering managers or departments to make decisions independently. This allows for more flexibility and responsiveness at lower levels of the business. Features: Authority: Lower and middle management or departmental heads have the authority to make decisions within their areas of responsibility.  Responsiveness: Managers or teams can make decisions more quickly, which helps in responding to local needs or customer demands. Communication: Communication can be more two-way, as there is more interaction between management and employees at all levels. Advantages: Flexibility: Lower-level managers can make decisions based on specific local circumstances, which allows for quicker responses to changes. Employee motivation: Empowering employees at lower levels can increase job satisfaction and motivation as they feel trusted to make decisions. Innovation: Decentralized structures encourage creativity and innovation because different departments or units can try new ideas and approaches. Disadvantages: Lack of consistency: Different parts of the business may make different decisions, leading to a lack of uniformity or confusion in company policies. Coordination challenges: With many people making decisions, there can be a lack of coordination and confusion about overall company goals or strategies. Diluted control: Senior management may have less direct control over specific decisions, which can lead to a lack of oversight and possible inefficiencies. Comparison Table : Feature Centralized Decision-Making Decentralized Decision-Making Decision- Top management or senior Middle and lower-level managers Makers executives Concentrated at the top of the Spread across different levels and Authority hierarchy departments Speed of Slower decision-making due to Faster decision-making at local levels Decision fewer people involved More flexible, able to respond to local Flexibility Less flexible, more rigid policies needs Less innovation, limited input from Innovation Encourages innovation and creativity lower levels Stronger control from senior Weaker central control, more Control management autonomy at lower levels Employee Can be lower due to lack of Higher morale due to empowerment Morale empowerment and trust High consistency across the May lack consistency between Consistency organization departments or units Management Manager has five primary roles: Planning: setting aims and targets for the organisations/department to achieve. It will give the department and its employees a clear sense of purpose and direction. Managers should also plan for resources required to achieve these targets – the number of people required; the finance needed etc. Organizing: managers should then organize the resources. This will include allocating responsibilities to employees, possibly delegating. Coordinating: managers should ensure that each department is coordinating with one another to achieve the organization’s aims. This will involve effective communication between departments and managers and decision making. For example, the sales department will need to tell the operations dept. how much they should produce to reach the target sales level. The operations dept. will in turn tell the finance dept. how much money they need for production of those goods. They need to come together regularly and make decisions that will help achieve each department’s aims as well as the organization’s. Commanding: managers need to guide, lead and supervise their employees in the tasks they do and make sure they are keeping to their deadlines and achieving targets. Controlling: managers must try to assess and evaluate the performance of each of their employees. If some employees fail to achieve their target, the manager must see why it has occurred and what he can do to correct it- maybe some training will be required or better equipment. Delegation – Passing down authority and responsibility to a subordinate (employee) Advantages of delegation More time for manager to do other tasks More interesting and rewarding work for employee (motivational) Employee feels trusted (motivational) Trains employee to do important tasks. Advantages to managers : managers cannot do all work by themselves managers can measure the efficiency and effectiveness of their subordinates’ work. However, managers may be reluctant to delegate as they may lose their control over the work. Advantages to subordinates: the work becomes more interesting and rewarding- increased job satisfaction employees feel more important and feel trusted– increasing loyalty to firm can act as a method of training and opportunities for promotions, if they do a good job  ❖ Leadership styles There are 3 main leadership styles – Autocratic, democratic and laissez-faire Autocratic – Leader is in charge and gives orders to employees Makes decision alone Everything depends on the leader May de-motivate employees May be an advantage for some businesses where decision needs to be made quickly Democratic – Other employees involved in decision making Communication between managers and employees Future plans are discusssed with other employees Motivates employees because they are involved in making decisions. Sharing of ideas within the business. Can delay decision making Laissez-Faire – “let it be” Leader sets objectives and employees makes decision and organise their own work. Can be useful when creative ideas are needed Highly motivational for employees as they control their own working life Poor coordination and decision making Relies on good team work Leadership style may be dependent on various factors. e.g. Type of business (creative or supply driven) Nature of task (requires cooperation?)  ❖ Trade unions A trade union is a group of workers who have joined together to ensure their interest are protected. They negotiate with the employer (firm) for better conditions and treatment and can threaten to take industrial action if their requests are denied. Industrial action can include overtime ban (refusing to work overtime), go slow (working at the slowest speed as is required by the employment contract), strike (refusing to work at all and protesting instead) etc. Trade unions can also seek to put forward their views to the media and influence government decisions relating to employment. Benefits to workers of joining a trade union: strength in number- a sense of belonging and unity improved conditions of employment, for example, better pay, holidays, hours of work etc improved working conditions, foe example, health and safety improved benefits for workers who are not working, because they’re sick, retired or made redundant (dismissed not because of any fault of their own) financial support if a member thinks he/she has been unfairly dismissed or treated benefits that have been negotiated for union member such as discounts on firm’s products, provision of health services. Disadvantages to workers of joining a trade union: costs money to be member- a membership fee will be required may be asked to take industrial action even if they don’t agree with the union- they may not get paid during a strike, for example.  Recruitment, Selection and Training Chapter 8 Recruitment Recruitment is the process of attracting, identifying, and selecting candidates for a job vacancy. It is a vital function of human resource management, ensuring that a company finds suitable people to fill open positions. Recruitment Methods: Internal recruitment is finding someone for the vacancy that already works for the business. As the old saying goes: “better the devil you know than the devil you don’t” It’s beneficial because the employee is a known quantity – managers will know their performance, their strengths and weaknesses and feel confident they are a good fit for the business. Furthermore – it will limit induction and training costs as the employee knows how the business operates already. Finally, it acts as an incentive to other employees – if workers see hard work and initiative results in promotion to a higher position in the business they will work harder. Internal Recruitment may fill the empty position, but the business still needs to find a replacement for the post that the employee has just been promoted from. External Recruitment allows a much wider choice of potential applicants, and can bring new ideas, fresh thinking and better ways of doing things. Although there is a higher recruitment cost, there may not be enough suitably skilled employees to fill the vacancies with internal recruitment, so often businesses must recruit externally. Steps in Recruitment: 1. Job Analysis: o Recognizing the need for a new employee, either due to growth, turnover, or expansion of operations. o The company assesses whether to fill the position through internal or external recruitment. 2. Job Description & Person Specification: o Job Description: Details the job role, responsibilities, and expectations (e.g., tasks, reporting structure, work hours). o Person Specification: Defines the qualities, skills, qualifications, and experience required for the role (e.g., education, experience, soft skills). 3. Advertising the job: The company connect with the best possible candidates for the position and let them know about the job, normally done through a job advertisement. To hire locally advertisement in a local newspaper or a local jobs website should be published. The job advertisement will tell  potential applicants about the job, what the requirements are and encourage them to apply. For External recruitment jobs are advertised in the following ways: Advertising: Job listings on company websites, social media, newspapers. Recruitment Agencies: Third-party services that help find candidates. Employee Referrals: Employees recommend people for the job. Job Centres & Headhunting: Agencies or direct recruitment for senior-level positions. 4. Selection Selection is the process of evaluating candidates to find the best fit for the job. This is done through interviews, tests, background checks, and reference checks. Steps in Selection: 1. Shortlisting: o After reviewing resumes or application forms, a shortlist is created of candidates who meet the job criteria. 2. Interviews: o Structured Interviews: A set list of questions asked to all candidates. o Unstructured Interviews: More open-ended, informal interviews. o Panel Interviews: Multiple interviewers assess the candidate together. 3. Testing: o Aptitude Tests: Measure general skills like numerical ability or logical thinking. o Skills Tests: Assess specific job-related skills (e.g., computer proficiency, typing speed). o Psychometric Tests: Measure personality traits and cognitive abilities. 4. Background Checks and References: o Checking the candidate’s qualifications, employment history, and character references. 5. Job Offer & Employment Contract: o If a candidate is selected, a job offer is made, followed by the issuance of an employment contract that outlines job terms (salary, benefits, responsibilities). Benefits and Limitations of Full Time and Part Time Employees Benefits: Part time workers allow a business more flexibility, part time employees can work more hours during busy periods of the year and less hours when there is less demand. Part time workers are often more productive, this may be because they are less tired  or more motivated than full time staff. Part time working can allow employees to have greater work life balance. For example parents might cut down to working three days a week so they can look after their children. Limitations: Part time staff can be an additional cost in training and recruitment. If two part time staff are hired to do 20 hours a week in the place of one staff member who can do 40 hours a week this may mean double the recruitment costs. Full time employees may be more committed to the company and more likely to aim for promotion. Part time employees may make communication more difficult. There will be more staff members who are at work less, so it is harder for messages to be delivered clearly. This may also have a negative impact on service as a customer has to deal with several different part time employees rather than one full time employee. It can be highly beneficial for a business to employ a mix of full time and part time employees. It allows the business to benefit from the greater flexibility part time staff can offer with the commitment and continuity that full time staff offer. However, this will depend on the industry. Professional, highly skilled jobs are more likely to be full time, and less skilled temporary jobs are more likely to be part time. Training Training is the process of developing employees' skills, knowledge, and abilities to perform their job roles effectively. Proper training helps employees meet job expectations and improves overall productivity. Types of Training: 1. Induction Training: o New employees are introduced to the company’s culture, policies, procedures, and their specific roles. 2. On-the-Job Training: o Training provided while the employee is working in their actual job environment. o Methods include job rotation, shadowing more experienced employees, and mentoring. 3. Off-the-Job Training: o Training that takes place away from the job, such as attending courses, workshops, or seminars. Benefits of Training:  Increased productivity: Trained employees perform their tasks more effectively and efficiently. Employee motivation: Employees feel valued when they receive training and development opportunities. Reduced turnover: Providing career development opportunities helps retain employees. Adaptation to change: Employees are better equipped to handle changes in the workplace, such as new technology or systems. Reasons for Reducing the Workforce Size There are several reasons a business may choose to reduce its workforce size, often referred to as downsizing or restructuring. Reducing staff can be a strategic decision in response to external or internal factors. Ultimately, leaders are responsible for the long-term profitability and competitiveness of the business. No business can afford to keep employees that aren’t productive and must consider all opportunities to reduce costs. There are four ways in which employees can stop working for an organisation: resignation, retirement, redundancy and dismissal. Redundancy and Dismissal. Resignation is when an employee leaves a job due to their own free choice, usually to move on to another job, or a change in personal circumstances. Retirement - in some countries employees must stop working at a certain age. Redundancy or “letting go” of an employee occurs when the job position no longer exists, and the employee can’t be moved to another vacant position. This can happen when a part of a business closes, or a factory relocates to another country where the cost of production is cheaper. Dismissal it the “your fired” moment. For either an employee breaking company rules, or for incompetence, not being able do the job to the required standard. Why reducing the size of the workforce might be necessary Reducing the size of the workforce (or downsizing) is required for three main reasons. Firstly, if there is lower demand for a particular product then it may not be profitable to continue production, so employees must be let go. Secondly workers may have to made redundant if machinery or artificial intelligence can take over their role, or if a business relocates to another country or area where costs are lower. Recommend and justify which employees to make redundant in given circumstances This is essential to choose which employees to keep and which employee to let go. With redundancy you must ensure the system is fair. This will minimise the negative impact on employee motivation, if workers know why some of their co-workers were made redundant, and why it was unavoidable. Often businesses ask for voluntary redundancy first. So they aren’t forced to choose which employees to let go. They can use a “Last in First Out System” so the last person to be employed is the first person to be made redundant if the business must downsize and the people close to retirement are chosen. Legal controls over employment issues Although there is no mention of it in the specification, large businesses employ Human Resources professionals to ensure they don’t break any laws. To protect employees from unfairness and discrimination at work many countries pass laws to ensure organisations treat workers fairly. Employees or governments may take legal action against businesses who break these laws. Legal action is when a business is taken to court. This is usually a very high cost for a business, damages a business’s reputation and has a negative effect on employee motivation. Employment contract is a legally binding agreement between an employer and an employee, outlining the terms and conditions of employment. Key Components of an Employment Contract 1. Job Title and Description o This specifies the role the employee will hold and the duties they are expected to perform. 2. Working Hours o The contract will outline the number of hours the employee is expected to work, including any overtime provisions, shift work, and rest breaks. 3. Salary and Benefits o The contract should detail the amount the employee will be paid (salary or hourly wage), how frequently they will be paid (e.g., weekly, monthly), and any additional benefits like bonuses, commissions, or company perks. 4. Holiday Entitlement o The number of paid holidays or vacation days the employee is entitled to, as well as any rules about taking leave. 5. Notice Period o This outlines how much notice either the employee or the employer must give before terminating the contract (e.g., two weeks, one month). It may also explain conditions under which immediate termination is possible. 6. Probation Period o A trial period during which the employee’s performance is assessed. If the employee does not meet the standards, the employer may terminate the contract without full notice. 7. Terms of Employment o This section covers issues like whether the contract is full-time, part-time, temporary, or permanent. It may also clarify if the employee has any restrictions, such as a non-compete clause or confidentiality agreements.  8. Health and Safety o The contract may outline the employer’s responsibility to ensure a safe and healthy working environment and the employee’s duty to follow safety procedures. 9. Disciplinary and Grievance Procedures o The contract may include the process to be followed if there is a dispute or if either party has a complaint. This ensures that both parties know how to handle issues appropriately. 10. Employment Rights o This section may include basic rights afforded to employees by law, such as protection against unfair dismissal, protection against discrimination, and rights to maternity or paternity leave. Unfair dismissal is when an employee has their employment terminated unfairly. For an employee it means they have protection against unfair dismissal and may sue the business if they feel they have been unfairly dismissed. For businesses it means they must be very careful when dismissing staff to make sure they have followed all the proper procedures, to make sure no legal action is taken against the business. Discrimination is being treated differently based on sex, age, gender, ethnicity or sexual orientation. Discrimination can occur during recruitment of new employees or anywhere where managers make decisions about employees’ working life, like promotion or deciding which tasks different employees do. If employees are discriminated against, then they can take legal action so businesses need to have rules and procedures in place to make sure all employees are treated fairly, and if there is an accusation of discrimination it can investigated thoroughly. Health and Safety is the duty of businesses to ensure all employees are safe at work. This means employees are properly trained, given the correct PPE (personal protective equipment) and making sure all machinery is safe. Employees have a duty to follow health and safety rules and report any danger in the workplace. Again, there can be legal action if Health and Safety rules are not followed. If an employee is injured at work, they may take legal action against the business. Legal Minimum Wage – in many countries there is a minimum amount employees must bepaid per hour or per month. If a minimum wage is introduced or increased, businesses will need to review their costs to ensure they can continue to operate profitably.  Chapter 15 Production of goods and services Production Production is the provision of a product of to satisfy consumer wants and needs. Adds value to raw materials and components A competitive business should combine factors of production efficiently in the right proportions Operations department The role of the operations department in a business is to take inputs and change them into outputs for customer use. The operations manager is responsible for making sure raw materials are provided and made into finished goods. 1. A factory manager 2. A purchasing manager 3. A research & development manager Productivity is the output measured against the inputs used to create it. Productivity = Output / Quantity of input Labor productivity = Output / Number of employees How to improve efficiency and productivity: 1. Improve the quality of product and inventory control to reduce waste 2. Replace employees with machines 3. Improve training to increase employee efficiency 4. Introduce new technology Benefits of efficiency and productivity: 1. Reduced inputs needed for the same level of output 2. Lower costs per unit 3. Fewer workers may be needed, may lead to lower wage bills 4. Higher wages might now be paid to workers, which increases motivations Inventory The buffer inventory level is the inventory held to deal with uncertainty in customer demand deliveries of supplies. Lean Production Lean production is a term for those techniques used by businesses to cut down on waste and therefore increase efficiency. Wastes that can occur: 1. Overproduction 2. Waiting 3. Transportation  4. Unnecessary inventory 5. Motion 6. Over-processing 7. Defects Benefits of lean production Costs are saved, THROUGH: 1. Less storage of raw materials and components 2. Quicker production 3. No need to repair defects 4. Better use of equipment 5. Cutting out some processes 6. Less money tied up in inventories 7. Improved health and safety of workers Kaizen Kaizen is a Japanese term meaning continuous improvement through the elimination of waste. Advantages of Kaizen: 1. Increased productivity 2. Reduced amount of space needed for production 3. Work-in-progress is reduced 4. Improved layout of the factory floor may allow some jobs to be combined. Just in time inventory control Just in time is a production method that involves reducing or virtually eliminating the need to hold inventories of ray materials or unsold inventories of the finished product. This reduces the costs of holding inventory The finished product is sold more quickly, so cash inflow is faster Methods of Production Method +Benefits –Limitations Skilled labour is often Skilled labour is often needed needed Costs are higher as labour Costs are higher as intensive labour-intensive Job production is where a single product is made at a time. Any errors can be expensive Any errors can be to correct expensive to correct Materials have to be Materials have to be especially purchased in especially purchased in small quantities small quantities  Flexible way of working Production can be easily Can be expensive as semi- changed finished products will need Batch production is where a quantity of to be moved around one product is made, then a quantity of Allows more variety of another item will be produced. products to be produced High storage costs Machines have to be reset Not greatly affected by between batches. machinery breakdown Boring system for workers High output of High storage requirements standardized product Flow production is where large Low average costs quantities of a product are produced in High set up costs due to lot a continuous process. (Also called of machinery Automation possible mass production) No need to move goods If one machine stops around working, the production will be halted. Factors affecting which method of production to use: 1. Nature of the product 2. Size of the market 3. Nature of demand 4. The size of the business How technology has changed production 1. Automation 2. Mechanisation– production done by machines but operated by workers 3. CAD (computer-aided design)- allows items to be designed online and be tested rather than drawing 4. CAM (computer-aided manufacture)- computers monitoring the production process 5. CIM (computer integrated manufacturing)– total integration of CAD and CAM Here are some things that technology does in shops: EPOS (electronic point of sale): When products' bar codes are scanned and the information is printed out on a receipt. Data is also sent to a computer to keep track of stocks. EFTPOS (electronic fund transfer at point of sale): When the cash register is connected to the retailer's main computer and banks. The customer's credit/debit card is swiped and the money is debited from the customer's bank account. A receipt is printed out to confirm the transaction. The advantages of new technology Increased productivity. Boring jobs done by machines. Boosts motivation. Training is needed to operate new machines. Workers become moreskilled. Better quality. Better stock control. Quicker communication and reduced paperwork. Info is available faster, resulting in faster decision making (for managers). The disadvantages of new technology Unemployment Expensive o To invest in new technology. o To replace outdated technology. Employees are unhappy with changes in the workplace. Chapter 16 Costs, scale of production and break-even analysis Fixed costs are costs that do not vary in the short run with the number of items sold or produced. Variable costs are costs that vary directly with the number of items sold or produced. Total costs are fixed costs and variable costs combined. Average cost per unit = Total costs/number of units. Economies of scale Economies of scale are the factors that lead to a reduction in average costs as a business increases in size. 1. Purchasing Economies of Scale 2. Marketing Economies of Scale 3. Financial Economies of scale 4. Managerial Economies of Scale 5. Technical Economies of Scale Scale of production As output increases, a firm’s average cost decreases. The five economies of scale are:  Purchasing economies: For large output, a large amount of components have to be bought. This will give them some bulk-buying discounts that reduce costs Marketing economies: Larger businesses will be able to afford its own vehicles to distribute goods and advertise on paper and TV. They can cut down on marketing labour costs. The advertising rates costs also do not rise as much as the size of the advertisement ordered by the business. Average costs will thus reduce. Financial economies: Bank managers will be more willing to lend money to large businesses as they are more likely to be able to pay off the loan than small businesses. Thus they will be charged a low rate of interest on their borrowings, reducing average costs. Managerial economies: Large businesses may be able to afford to hire specialist managers who are very efficient and can reduce the business’ costs. Technical economies: Large businesses can afford to buy large machinery such as a flow production line that can produce a large output and reduce average costs. Diseconomies of scale Diseconomies of scale are the factors that lead to an increase in average costs as a business grows beyond a certain size. 1. Poor communication 2. Low morale 3. Slow decision-making They are: Poor communication: as a business grows large, more departments and managers and employees will be added and communication can get difficult. Messages may be inaccurate and slow to receive, leading to lower efficiency and higher average costs in the business. Low morale: when there are lots of workers in the business and they have non- contact with their senior managers, the workers may feel unimportant and not valued by management. This would lead to inefficiency and higher average costs. Slow decision-making: As a business grows larger, its chain of command will get longer. Communication will get very slow and so any decision-making will also take time, since all employees and departments may need to be consulted with. Businesses are now dividing themselves into small units that can control themselves and communicate more effectively, to avoid any diseconomies from arising. Break-even level of output Break-even level of output is the quantity that must be produced/sold for total revenue to equal total costs. Break-even charts are graphs which show how costs and revenues of a business change with sales. They show the level of sales that business must make in order to break even. The revenue of a business is the income during a period of time from the sale of goods or services. The break-even point is the level of sales at which total cost = total revenue Margin of safety is the amount by which sales exceed the break- even point. The contribution of a product is its selling price less its variable cost. Example: In the chart below, costs and revenues are being calculated over the output of 2000 units. The fixed costs is 5000 across all output (since it is fixed!). The variable cost is $3 per unit so will be $0 at output is 0 and $6000 at output 2000- so you just draw a straight line from $0 to $6000. The total costs will then start from the point where fixed cost starts and be parallel to the variable costs (since T.C.= F.C.+V.C. You can manually calculate the total cost at output 2000: ($6000+$5000=$11000). The price per unit is $8 so the total revenue is $16000 at output 2000. Now the break-even point can be calculated at the point where total revenue and total cost equals– at an output of 1000. (In order to find the sales revenue at output 1000, just do $8*1000= $8000. The business needs to make $8000 in sales revenue to start making a profit). Uses of break-even charts Can identify expected profit or loss Impact on revenue of a certain decision can be analysed. Shows margin of safety Advantages of break-even charts:  Managers can look at the graph to find out the profit or loss at each level of output Managers can change the costs and revenues and redraw the graph to see how that would affect profit and loss, for example, if the selling price is increased or variable cost is reduced. The break-even chart can also help calculate the safety margin- the amount by which sales exceed break-even point. In the above graph, if the business decided to sell 2000 units, their margin of safety would be 1000 units. In sales terms, the margin of safety would be 1000*8 = $8000. They are $8000 safe from making a loss. Margin of Safety (units) = Units being produced and sold – Break-even output Limitations of break-even charts: They are constructed assuming that all units being produced are sold. In practice, there are always inventory of finished goods. Not everything produced is sold off. Fixed costs may not always be fixed if the scale of production changes. If more output is to be produced, an additional factory or machinery may be needed that increases fixed costs. Break-even charts assume that costs can always be drawn using straight lines. Costs may increase or decrease due to various reasons. If more output is produced, workers may be given an overtime wage that increases the variable cost per unit and cause the variable cost line to steep upwards. Break-even can also be calculated without drawing a chart. A formula can be used: Break-even level of production =Total fixed costs/ Contribution per unit Contribution = Selling price – Variable cost per unit (this is the value added/contributed to the product when sold) In the above example, the contribution is $8 -$3 =$5, so the break-even level is: $5000/$5 = 1000 units! Achieving Quality Production Chapter17 The Importance of Quality Quality considers the characteristics and features of a product that satisfy the needs of customers o Businesses need to maintain a level of quality for several reasons ▪ Attract and retain loyal customers ▪ Build the reputation of the business or brand  ▪ Reduce wastage and returns from unsatisfied customers The quality of a business’s products can provide a competitive advantage o High quality and minimal defects lower business costs allowing lower selling prices to better compete with rivals o High quality can be used in promotional activity and provide a unique selling point for businesses in competitive markets o Successfully developing a USP for quality can improve business reputation and ease expansion into new markets If quality is not maintained, then businesses may be at risk of o Losing their competitive advantage and customers to other brands who offer better quality goods/services o Experiencing higher costs due to having to replace faulty or defected goods o Gaining a poor reputation as customers spread poor reviews about the business to others Customer perceptions of quality are influenced by numerous factors Diagram: factors that influence quality perception The perception of quality is influenced by the brand, the product and the customer service Customers may consider products or services to be of good quality if they o Look good and are sold by a reputable business or brand o Are reliable and durable o Are safe and fit for purpose o Receive good customer service, including after-sales service In some countries laws protect consumers so businesses need to ensure that the products it sells are free of faults or defects to avoid harming customers or their reputation Quality Control Quality control is a traditional method of checking quality at the end of the production process using quality inspectors to find faults It is not possible to achieve perfection in every production process o E.g. There will always be some variation in terms of materials used, production skills applied, reliability of the finished product Quality Assurance Quality assurance involves employees checking quality standards throughout the production process It aims to achieve quality by organising every process to get the product 'right first time' and prevent mistakes happening o There is an emphasis on 'self-checking' rather than checking by inspectors at the end of the process Total Quality Management (TQM) is a specific approach to quality assurance that aims to develop a quality culture throughout the firm o TQM is the continuous improvement of products and processes by focusing on quality at every stage of production o It tries to get it right first time and achieve ‘zero defects’  Location Decisions Chapter 18 Location is the site from which a business decides to operate A business may look for a new location if it is setting up for the first time or the existing location no longer meets its needs o A new site may become available that is more attractive to the business, e.g. it has a larger staff car park or room for further expansion The business may look to locate sites in their home country or abroad o Large companies such as Apple or Nike have chosen to locate their factories where labour and material costs are low Choosing a good location can generate positive impacts for the business Many businesses have failed due to having established themselves in a poor location o A good location can reduce costs, whereas a poor location will increase them o A good location provides excellent access to sufficient customers, whereas a poor location limits customer interaction o A good location provides access to a skilled workforce, whereas a poor location limits access to the required human skills Factors Affecting the Location of a Manufacturing Business  The ideal business location depends upon the type of business and what it produces/sells o Manufacturing business are likely to have different location priorities than service sector businesses o B2B businesses are unlikely to need to locate close to passing trade, whilst B2C businesses may choose a location with high footfall Factors Affecting the Location of a Service Business Businesses in the service sector also consider further factors when determining a suitable location o Proximity to customers is very important for retail businesses  ▪ Premises must be accessible and convenient so a location with a car park or close to transport links is likely to be a key influence ▪ Locating in areas with high footfall, such as on a high street or in a shopping mall, is a popular choice for retailers o In some cases, a location may be chosen to take advantage of a shared customer base or a particular reputation o Climate and geographical factors can be a key factor for some specialist service providers ▪ E.g. Businesses offering ski instruction will locate in mountainous areas with high annual snowfall o Services businesses that do not rely on passing trade may locate in out-of-town premises ▪ Rent and business rates tend to be lower ▪ Incentives for job creation such as grants may be available from local authorities o In addition, businesses are likely to avoid locating in areas with high levels of anti-social behaviour and crime, as this could impact insurance costs Factors to Consider when Choosing a Country to Produce In A multinational company (MNC) is a business that has operations in more than one country o This can include physical stores, manufacturing plants, factories, offices and service operations Globalisation means that many firms can now consider establishing production locations worldwide rather than just their home country The Role of Legal Controls on Production Location Decisions Laws are rules created by the government of a country with the aim of regulating the actions of its citizens and businesses  o Regulation is the process of enforcing the laws that have been created and ensuring that businesses abide by them Governments and local authorities can incentivise businesses to locate areas o In areas of high unemployment or industrial decline grants or reduced tax rates may be offered to businesses that create jobs or improve communities In some cases, businesses are deterred from locating areas o E.g. In areas of outstanding natural beauty, strict bylaws or city ordinances may regulate the type of business activity that is permitted o E.g. A country with strict environmental laws might not be an attractive location for a manufacturing company that produces a lot of waste The presence or absence of laws can affect a business’s choice of location in two ways 1. Less economically developed countries Less economically developed countries often have fewer laws and less enforcement of their existing laws, which is likely to be attractive to some businesses o Businesses enjoy lower costs as they have to meet fewer legal requirements, such as safe handling of waste material o Labour can be paid very low rates as no minimum wages exists o Employees and customers have less opportunity to pursue legal action 2. More economically developed countries Developed economies with extensive laws can be attractive to businesses who desire to locate in region with o Good infrastructure o Highly-skilled workers o High standards of living