Wuolah Free CHAPTER 3

CHAPTER-3.
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Economía de la Empresa
1º Grado en Empresa Internacional
Facultad de Economía y Empresa

Universidad de Barcelona
Reservados todos los derechos.

No se permite la explotación económica ni la transformación de esta obra. Queda permitida la impresión en su totalidad.
BLOCK 3: COMPANY SIZE
Block 3.1_Company size:
3.1 Points of view of company size:

There are 5 points of view to state the size of a company:
1. Technological point of view
● The bigger the company is, the more the workers can specialize
● Productivity increases and learning time for new employees decreases

● The company can fit each employee to the job that best suits him/her
● Employees can get bored of their job
● The company usually pays productivity incentives to motivate workers
2. Sales point of view
● If the market is huge, the company size must cover the market
● Small and medium-sized companies usually compete in small markets
because these companies cannot afford to grow
● So, the market size kind of tells us the company size
3. Finance point of view
● The bigger the company is, the easier it to find financial support from
banks and the government
● If the company is small, financial institutions won’t trust in the company’s

prospects or its ability to meet its commitments
● So, if a company needs to find financial support, its structure and size
must be as stable and big as possible
4. Management point of view
● Small companies have easier and less complicated managements

● When a company grows, its management must evolve and be more
organized and have a stronger hierarchy
● Many companies have softer managements when they grow, and this is
one of the most common reasons for failure to grow
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5. Risk point of view
● Bigger companies have more market control, and they can assume risks
to achieve goals
● Small companies can take risky decisions once, maybe twice, but must
follow the path of big companies and wait for them to change behaviours
si lees esto me debes un besito

Block 3.2_ Break-even point:
3.1 Basic concepts:
Cost: Goods and services consumed – can be evaluated in terms of money
Expense: Payment for goods and services. The expense (or payment) may not
occur at the same time as the cost (the consumption of the goods or services)
Fixed costs:
● Don’t depend on sales

● Exist even when the company is not producing
● Examples:
○ Set-up costs
○ Local rental

○ Salaries of administrative staff
○ Etc.
Variable costs:
● Depend on units sold

● They only exist when we are producing and selling goods
○ Examples:
■ Raw materials
■ Workers’ salaries
■ Direct power costs
Semi-variable costs:
● Costs that have a fixed and a variable component

● They don’t grow proportionally to sales; they have a fixed part that
remains fixed and a variable part that changes with production
○ Examples:
■ Power (fixed amount and variable fee per kWh)
■ Consultancy (fixed fee per month and variable fee per
project)

3.2 Opportunity cost:
● We must decide what to produce in our company
● We have different options
○ When we chose, we are giving up the 2nd choice, the opportunity cost
is the value of the 2nd choice
Examples: We can produce 100 motorbikes or 300 bikes. If we decide to produce
bikes, we’ve given up the option of producing 100 motorbikes. This is the opportunity
cost.
3.3 Break-even point:

What is the Break-even point? The break-even point is the moment when our
revenue and costs are equal:
Total Revenue = Total Cost

So… How we calculate it?
Break-even point (BeP) in units = FC / (p-VC*)
Break-even point (BeP) in sales = FC ✕ p/ (p-VC*)

What is the Break-even analysis?
Desired profit / contribution margin per unit + Break-even point (BeP) in units = Number of units
3.4 Formulas of the Break-even point:

o Q → Quantity of your production
o FC → Fixed Costs
o VC → Variable Costs.

VC * Variable Costs per unit) = VC/Q
TR (Total Revenue) = p ✕ Q (price ✕ quantity)
TC (Total Cost) = FC (Fixed cost) + VC (Variable cost)
3.5 Contribution Margin:

Contribution Margin is a concept that lets a company determine the
profitability of its individual products
How we calculate it?
Contribution Margin (CM) = p (price) – VC* (variable cost per

unit)
The variable costs are the cost we have per unit of production
VC = VC* x Q, where Q is the quantity of production
The VC* is the variable cost per unit
The price (p) is the amount of money we receive per sold unit
3.6 Margin Safety:
Margin Safety: The margin of safety is the difference between where we are
operating and the break-event point

Block 3.3_ Company size and Economies of Scales:
3.1 Economies of Scales:

Economies of scales: When a company increases its production, it usually gets
better prices, and in general is able to reduce unit costs.
3.2 Hoover’s principles:
The best way to describe economies of scale is with Hoover’s principles:
a) Principle of multiples
b) Stockpiling principle
c) Large quantities operations principle
Which try to explain why increasing the company size leads to lower costs
a) Principle of multiples
It’s based on the imperfect division of productive factors (mechanical machines,

buildings, etc.)
If we increase the outputs (production), we’ll divide the cost of the productive
factors by more units, and have lower costs.
No-load operations costs: Costs that we have because we are not using our
equipment at maximum level. Appear because of underutilization.

The problem:
If we have one machine of each, we will produce only 100 units per day
(bottleneck)
Machine B is at 50%, C at 33% and D at 20%
What’s the best combination of machines to maximize production?
The solution:
We have to calculate the minimum common multiple:
MCM (100, 200, 300, 500) = 100*2*3*5 = 3000

Number of A machines = 3000 / 100 = 30
Number of B machines = 3000 / 200 = 15
Number of C machines = 3000 / 300 = 10
Number of D machines = 3000 / 500 = 6
b) Stockpiling principle
Companies always have stocks to

cover possible problems
Stocks are not proportional to

production
Big companies have a smaller %

of stocks than small ones
Big companies have lower costs

due to stockpile accumulation

c) Large quantities operations principle
The more we buy, the less we pay (per unit)
The more we produce, the better we are producing (lower timings)
The more we produce, the more we learn (better quality)…
3.3 Leverage:
Big companies have higher FC (Fixed Costs) and lower VC (Variable Costs).
These companies can have huge profits one year and huge losses the next year

if sales change only a little. They have big LEVERAGE.
Leverage: A small increase or decrease in a company’s sales causes a bigger increase

or decrease in the company’s results (related to FC).
If sales grow → Profits grow proportionally to FC
If sales decrease → Profits decrease proportionally to FC
FC act as a lever
3.4 DOL or Degree of Operating Leverage:
DOL: is a measure used to evaluate how a company's operating income changes with
respect to a percentage change in its sales.
Degree of Operating Leverage (DOL) = ((p- VC*)✕ Q) / ((p- VC* )Q – FC)
DOL = Q/ (Q - BeP)
3.5 Coverage coefficient:
CC: Is a measure of a company's ability to service its debt and meet its financial
obligations
Coverage Coefficient (CC) = (p- VC* ) /p
Break-even point (BeP) in money = FC/CC
Bf (Benefit) = (p-VC*) · Q – FC
3.6 All formulas:
o Q → Quantity of your production

o FC → Fixed Costs
o VC → Variable Costs.
VC * Variable Costs per unit) = VC/Q
VC= VC* x Q, where Q is the quantity of production
TR (Total Revenue) = p ✕ Q (price ✕ quantity)
TC (Total Cost) = FC (Fixed cost) + VC (Variable cost)
Contribution Margin (CM) = p (price) – VC* (variable cost per unit

Degree of Operating Leverage (DOL) = ((p- VC*)✕ Q) / ((p- VC* )Q –
FC)
DOL = Q/ (Q - BeP)
Coverage Coefficient (CC) = (p- VC* ) /p
Break-even point (BeP) in money = FC/CC
Bf (Benefit) = (p-VC*) · Q – FC


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CHAPTER-3.

1º Grado en Empresa Internacional

Facultad de Economía y Empresa

Reservados todos los derechos.

3.1 Points of view of company size:

1. Technological point of view

Reservados todos los derechos.

2. Sales point of view

● So, the market size kind of tells us the company size

3. Finance point of view

● If the company is small, financial institutions won’t trust in the company’s

4. Management point of view

● Small companies have easier and less complicated managements

si lees esto me debes un besito

3.1 Basic concepts:

Cost: Goods and services consumed – can be evaluated in terms of money

● Don’t depend on sales

Reservados todos los derechos.

● Depend on units sold

● Costs that have a fixed and a variable component

si lees esto me debes un besito

● We must decide what to produce in our company

● We have different options

3.3 Break-even point:

Reservados todos los derechos.

Total Revenue = Total Cost

Break-even point (BeP) in units = FC / (p-VC*)

Break-even point (BeP) in sales = FC ✕ p/ (p-VC*)

si lees esto me debes un besito

3.4 Formulas of the Break-even point:

Reservados todos los derechos.

TR (Total Revenue) = p ✕ Q (price ✕ quantity)

TC (Total Cost) = FC (Fixed cost) + VC (Variable cost)

Break-even point (BeP) in units = FC / (p-VC*)

Break-even point (BeP) in sales = FC ✕ p/ (p-VC*)

3.5 Contribution Margin:

How we calculate it?

Contribution Margin (CM) = p (price) – VC* (variable cost per

VC = VC* x Q, where Q is the quantity of production

The VC* is the variable cost per unit

si lees esto me debes un besito

3.1 Economies of Scales:

c) Large quantities operations principle

It’s based on the imperfect division of productive factors (mechanical machines,

si lees esto me debes un besito

Machine B is at 50%, C at 33% and D at 20%

What’s the best combination of machines to maximize production?

We have to calculate the minimum common multiple:

MCM (100, 200, 300, 500) = 100*2*3*5 = 3000

Reservados todos los derechos.

Number of B machines = 3000 / 200 = 15

Number of C machines = 3000 / 300 = 10

Number of D machines = 3000 / 500 = 6

Companies always have stocks to

Stocks are not proportional to

Big companies have a smaller %

Big companies have lower costs

si lees esto me debes un besito

The more we produce, the better we are producing (lower timings)

The more we produce, the more we learn (better quality)…

Reservados todos los derechos.

Leverage: A small increase or decrease in a company’s sales causes a bigger increase

If sales grow → Profits grow proportionally to FC

MCM (100, 200, 300, 500) = 10023*5 = 3000

Degree of Operating Leverage (DOL) = ((p- VC)✕ Q) / ((p- VC )Q – FC)