C18 Productivity
Production – process of making of a product or
service to satisfy consumer wants and needs
Productivity: measure of the output of a business in
relation to its inputs ; is a measure of efficiency
Formula: Output/Input (number of worker/machine)
Reasons for Calculating Output per Worker:
1. Calculate wage (k) some workers are paid
piece rate so must know output made
2. Measures labor efficiency
3. Can compare with previous years/other
businesses
4. Identify training needs (k)
5. For employee appraisal (k) can give bonus to
those who meet targets set
6. Identify poor performing workers/indicate
problems with morale so HR can address the
issues
7. Has an impacts on unit cost [k]
Why is Labor Productivity Important?
1. High productivity can lower AC (k) can help
improve price competitiveness
2. High productivity can lower AC (k) increases
profit margins (an)
3. High productivity mean effective use of
resources
4. High productivity increase competitiveness
of business and helps meet customers
demand o
5. more output means more sales
Efficient business: achieve objective in a cost-
effective manner; (uses minimum resource inputs)
Benefits of Being Efficient
✓ reduces unit costs (k) so bz can keep prices low
✓ improves reputation(k) as products are delivered
on time so attract more customers
✓ less waste (k) need less materials (ap)
✓ increased output OR quicker production [k] so
have more sales [an]
✓ Fewer workers needed [k] so save labor cost
✓ Better able to compete [k] in a competitive
market [app]
✓ Fewer errors (k) improve reputation and sales
C18: Production
Inefficiency: input output ratio is low;
not maximize productivity; implies poor of resources
Problems of Inefficiency
X High unit costs lead to a loss of competitiveness
and hence lower sales.
X Waste of time and resources
X Unable to supply on time
X Quality defects
Methods to Improve Productivity/Efficiency
1. Introduce new technology (k) less likely to
break down [an] result in quicker production
of products & an increase in the output per
employee. However, the bz would need to
ensure they can afford it [an]
2. Automation – Replace workers with
machines [k] – no need to rest/no drop in
quality due to tiredness [an]. Change to
automated or CI methods - machines don’t
have to take break and can work longer
periods so are able to produce more in the
same amount of time
3. Improve working conditions to improve
morale [k]
4. Training so workers understand what they
are doing so less mistakes/improve skills [an]
but training is expensive & time-consuming
5. Higher employee motivation (k) increase pay
so employees work harder (ap) Payment by
performance (k) use of piece rate [k] as
workers will produce more to earn more
[app]
6. Improve quality control/assurance [k] so less
rework required/workers take more care [an]
to reduce level of waste [ap]
7. Use of TQM [k] so workers are more
responsible for work [an]
8. Improve inventory (stock control)/introduce
JIT [k] so materials are available when
needed [app] lowers AC (an)
9. Use Kaizen: Improve layout of machines [k]
so less wasted time moving between
different areas (an)
10. Use of cell production/kaizen [k] as it allows
employees to discuss/solve problems
affecting production [app]
11. Change management style [k] to democratic
rather than autocratic [app] so that workers
feel involved and willing to work [an].
12. Specialization: use DOL, workers concentrate
on what they are good at
1
Does Improving Efficiency Increase Profits?
Yes: higher efficiency lowers unit costs (k) so able to
lower prices [an] which could help boost demand
[an] for its products. Higher efficiency can lower
prices which could lead to lower costs [an].
No: Faster production could compromise quality [k].
Introducing new technology might increase costs [k]
when already worried about lower profits.
Eval: other ways to improve profits e.g. Reduce fixed
costs OR increase revenue
18.2 Production Methods
1. Labor intensive: production process where
workers input is the key resource used in the
business
✓ Can make specialized products as per consumer
preference (job production) so is able to charge
higher prices
X Do not benefit from EOS, produce in small quantity
so have higher AC
C18: Production
2. Capital intensive: production processes where
machinery and technology are the dominant
resource input
Benefits of CI Methods to the Business:
✓ higher of output (k), so able to meet more orders
(an)
✓ lower AC (k) as benefit from technical economies
of scale (an)
✓ better quality (k), so able to charge higher prices
for products (an)
✓ uniformity of products [k] as less errors are made
[an]
✓ improves productivity [k] which can help reduce
average costs [an]
✓ reduce labor costs [k] so lower total costs for
business [an]
✓ faster production [k] as machines can make more
in less time [an]
✓ machines are able to handle more complex work
[k] so able to develop better/more advanced
products [an]
Impact of CI Methods on Employees:
✓ greater job security for those with jobs [k] if profit
increases [an]
✓ chance to learn new skills [k] or even gain more
responsibility [k]
✓ need for re-training [k] which could create
promotion opportunities [an]
✓ opportunities to learn new skills [k] which could
improve chances for self-improvement or
promotion, higher pay [an]
✓ safer conditions as up to date technology [k] so
less risk of injury [an]
✓ work less tiring [k] as machines do the repetitive
work [an]
X fear of redundancy (loss of jobs) as machines
replace jobs [k] could decrease motivation [an]
X deskilling [k] so workers become bored due to
repetitive nature of job [an]
X implications for pay e.g. lower wages [k] so lower
living standards [an]
X workers might lose their jobs [k] leading to lower
living standards [an].
Eval: some clearly benefit [eval] but as machines are
usually introduced to reduce the labor force, more
workers are likely to be worse off leading to lower
standard of living [eval]
2
 C18.3 JIT
Businesses hold inventories to ensure that there are Problems of High Inventory Level
always enough products to satisfy demand of
customers. If a business doesn’t have enough stock X increased insurance/security costs [k] as more
of a product it might lead to lower sales. goods need to be protected against theft [an]
X increased storage costs [k] as will need more
Factors that influence the amount of inventory held space/increases business expenses [an]
X cash flow/liquidity problems [k] as money held as
1. Demand from customers/amount of sales- stock [an]
the higher the demand, the more inventory X risk of obsolescence/wastage [k] because customer
held requirements might change [an]
2. Perishability of the items – the more X risk of damage [k] as need to be stored which could
perishable, the less inventory held increase costs [an]
3. Storage space available: less storage space X opportunity cost [k] resources could be used
limits the amount of inventory held elsewhere to become more efficient (app)
4. Cost of storage: the higher the cost of
storage, the less inventory held Benefits of Low Inventory Level
5. Delivery charges: the higher the delivery
charges, the more the inventory held ✓ lower inventory holding costs [k] help reduce fixed
6. Amount of money available (to buy costs such as rent[an]
inventory): the more the cash flow, the
✓ lower security OR insurance [k] as less for
more inventory held
inventory needs to be safeguarded (an)
7. Lead time/reliability of supplier: the longer
✓ more flexible [k] as adapt to each different batch
the lead time or the less reliable the
[app]
supplier, the more inventory is held
8. Method of production: (mass may require ✓ help cash flow [k] money is not tied up in inventory
high inventory compared to job production ✓ less risk of waste OR damage OR obsolescence
9. Inventory System: a business that uses JIT
will keep minimum inventory
Problems of Low Inventory Level
Buffer: minimum stock held by a business to deal
with uncertainty in customer demand & delay in X possible delays in production [k] as batches delayed
supplier delivery (JIC) [app] leading to lower output [an]
X less or no purchasing economies of scale [k] which
Advantages of Buying Bulk (High Inventory) could help reduce cash outflows [app]
X unable to meet orders [k] of customers [app] so
✓ purchasing economies of scale [resources will be could damage reputation [an]
cheaper] as discounts reduce cash outflow [app]
✓ able to meet orders [k] as goods ready to be sent
out [app] so able to offer better customer
service[an]
✓ no delays in production (k) materials always
available when needed so able to maintain its flow
production [an]
✓ little chance of stock outs [running out of stock]
✓ requirement to order less often, so less admin and
transport costs
✓ save on delivery costs
✓ avoid supply problems [k] as some types of goods
might be difficult/long time to obtain [app]

C18: Production 3
JIT: method to eliminate inventory of raw materials How to Solve Problems with Suppliers
and finished goods. Supplies arrive just as the time
needed in production
Factors to Consider Before Using JIT
1. Reliability of Suppliers: will supplier be able
to deliver on time in the right quantity. What
is the / distance from suppliers. Are the
materials readily available at suppliers
2. Predictable Demand: for JIT to work the
business must have a steady production or
predictable demand so it can plan its
purchases
3. Efficient system of ordering / good
communication systems: business needs to
have an electronic system that can monitor
inventory and can re-order when supply
level falls
4. Discounts for Bulk Purchases: business
needs to consider possible discounts gained
from bulk buying before using JIT
5. Cost of Rent: before business buys more
inventory, it must consider the cost and
availability of storage space.
Benefits and Limitations of JIT:
✓ Less inventory held [k] so less chance of wastage
[an] or going outdated
n]
✓ Lower security costs [k] as don’t have to spend as
much on insurance [an] which will help reduce
expenses
✓ Less warehouse space needed [k] so have more
space available for production [an]
✓ Lower storage costs [k] so business saved on
rental costs (an)
✓ Improve working capital [k] as less money tied up
in inventory [an] improve cash flow
✓ Improved quality [k] as ingredients are fresher
[app] so increase in sales [an]
1. Improved communication [k] with suppliers
[app] so suppliers understand when stock is
needed [an]
2. Change (to local) suppliers [k] so do not need
to import [app] so less chance of the delays,
due to transport issues [an]
3. Hold more inventory [k] so have stock readily
available [an] to be able to meet increased
demand [app]
4. Increase number of suppliers [k] so have
more options to get inventory on time [app]
Factors in Choosing Suppliers
1. Price charged [k] to maximize profits, a
business will prefer to buy from cheapest
supplier to reduce AC
2. Credit Terms: a business will prefer to buy
from supplier with good credit terms to help
improve its cash flow [an]
3. Variety: business will buy from supplier that
has a wide range so it can get what is needed
4. Reliability: Buy from supplier who deliver
right quantity at the right time
5. Quality: buy quality inputs to make quality
outputs
6. Location: a far distance can affect lead time
and transport costs

X Very reliant on suppliers to deliver stock when

needed / if parts not available or late, it will delay
production [k]
X May not be able to meet sudden/unexpected
order [k]so lost sales (an)
X Little room for mistakes (as minimal stock available
for rework) [k] delay in delivery to customers
X Less (purchasing) economies of scale [k] loss of
discounts

C18: Production 4
18.4 Lean Production 18.5 Technology

Lean Production: techniques to cut down waste & Automation or System of production where
increase efficiency Automated machinery and technology
Production carry out the work so few
Lean Production Methods/Techniques workers are needed.

1. Kaizen: means continuous improvement by Mechanization Production is done by

the elimination of waste. It involves workers machines and robots, but
meeting regularly to discuss problems and to operated by people. Useful for
find solutions. dangerous and difficult jobs
2. Kaizen: reorganized floor plan to save space
and improve workflow. Computer aided Software to draw items being
3. JIT: Eliminate the need to hold stock. Order design (CAD) designed more quickly. It is
materials when needed for production, used to design or re-style
which reduces storage costs [an] existing products
4. Cell Production (teamwork ) : where
production is divided into separate units Computer aided Computers monitor the
(cells) each making a part of the finished manufacture production process done by
product. Rather than having a flow or mass (CAM) machines and robots
production. Cell Production improves Computer integration of CAD and CAM;
employee morale so they work harder and integrated computers design products
more efficient. manufacturing and are linked to the
(CIM) computers that aid in the
manufacturing process
Benefits of Using LP Methods
EPOS (retail) used in checkout where
✓ better quality and less defects (k) use of Cell price/description of the item is
Production means workers work in teams – satisfy displayed and printed in
social needs - so more motivated staff [an] receipt. Inventory record is
✓ motivated workers (k) Use of Kaizen mean automatically changed and at
workers involved in giving suggestions to improve re-order point, inventory can
production – workers are more motivated [k] could be automatically re-ordered.
lead to better quality [an]
✓ Time saved : use of kaizen reorganizes
operational space needed to reduce time moving
between workstations [k] which could lower rental IMPACT of TECHNOLOGY to the SHAREHOLDERS
costs [an]
✓ Time saved [k] Cutting out some processes so ✓ Impact on efficiency – lower AC- sell cheaper-
quicker production [app] so greater output possible more sales and more profits
[an] more orders can be taken
✓ Reduced stock holding costs [k] use of JIT means X Increased investment costs
lower levels of stock required on site [an] so less
capital tied up as stock
✓ Saves storage costs [k] use of JIT so less space
needed for storing (an) and areas released can be
put to more productive use. Lower fixed costs.
✓ Less waste/obsolescence (k) some goods have
short life cycles (ap) by using JIT goods arrive when
needed so more fresh, less waste

C18: Production 5
BENEFITS of TECHNOLOGY to the BZ IMPACT of TECHNOLOGY on CUSTOMERS

✓ Improves labor productivity (k) more output made ✓ method could result in lower costs and hence
can meet more orders [an] increase sales (an) business can sell at lower prices
✓ Quality products (k) can charge higher prices [an] ✓ quality standards should be constant
✓ Ensure consistent quality [k] as machinery likely to ✓ improved availability
make fewer errors [an] which can help enhance
reputation [an] X production costs might rise in the short term which
✓ Increase labor productivity [k] which can help may result in higher prices
reduce average costs [an] can sell at lower prices X not automatically lead to lower prices so the
✓ use of CAD/CAM can make innovative products (k) company might benefit but not the customer
increasing potential sales [an]
✓ Less workers needed (k) so save on labor costs (k)
so lower total costs
IMPACT of TECHNOLOGY to the EMPLOYEES
✓ Quicker (k) machines do not need breaks [k] so
more output can be made. Machines can make more
✓ Possible training – enhance skill, which could
in less time [an]
create opportunities for promotion [an] and may
✓ Safer for workers (k) Machines are able to handle
receive higher pay [an]
more complex work (an) Less risk of worker injury
✓ Increase safety - complex work done by machines
✓ Continuous production 24/7 operation (k) no
so less risk of worker injury [an]
break so more output
✓ Company survives [k] because they remain
✓ Reduce wastage/less mistakes [k] help reduces re-
competitive [app] so workers keep their jobs [an]
work costs (an) improves reputation (an)
✓ More skilled workers may be needed [k] leading to
✓ Increased reputation of the business
higher pay [an]
X Higher cost of equipment [k] which business might
X Fewer workers needed (k) possible loss of jobs –
not be able to afford [an] increases FC
lower standard of living for workers (an)
X Risks of job insecurity [k] could lead to other
X More job insecurity (k) so could reduce motivation
demotivation [an] lead to inefficiency
(an)
X Workers may struggle to adapt OR resist new
X Possible change to working practices – fear of
training [k] slowing production OR decreasing
change [k] as production process likely to change
productivity
how they do things [an]
X Need for retraining [k] which would increase costs
X Less skills needed [k] so could mean lower wages
X Cost of maintenance [k]
[an] leading to lower living standards [an]
X Impact on motivation e.g. demotivate
workers/boring [k] as skilled [app] so may not want
Eval: Technology will not benefit all employees as it
to leave (an)
depends on the individual worker. Those who lose
their jobs will not see the benefit from technology
Eval: Tech can reduce AC and improve profitability,
[eval] whereas those who keep their job can benefit
but there are other ways to improve profits. Use
from learning new skills. [eval]
cheaper materials to lower VC; introduce KAIZEN
and redesign factory outlet to make it more efficient.
Bz can also increase advertising but this can be
expensive and may not be effective.

C18: Production 6
18.6 INVEST in NEW MACHINES Factors to consider when deciding to introduce new
technology in a business.
✓ Accuracy so less mistakes, less wastage of
resources 1. Cost of technology [k] is the business able to
✓ Lower labor costs e.g. fewer employees to afford [an]
pay/less overtime/training 2. Cost of training time taken for training/are
✓ Less maintenance costs e.g. less machine workers able or willing to learn how to use it
breakdown/lower maintenance costs [k] business must train its workers increasing
✓ Less running costs e.g. less electricity (as more its expenses [an]
efficient) 3. Potential efficiency gains [k] how much
output will be gained, the higher the output,
✓ Increase productivity [k].
the lower average cost [an] so can be price
competitive
X Need to retrain workers to use new machine [k]
4. How many workers may lose jobs/number of
which will increase training expenses [an]
redundancies [k]
X Cost of investment [k] bz may have to take loans
5. Level of demand [k] high D justifies the need
(an) to pay for new machines
to use technology
X Reaction of employees/fear of unemployment
6. Opportunity cost [k] could the funds be used
[k]workers may not have the skills to use new
for some other expense
machine
7. Availability of power [k] technoloqy requires
power supply
Is recruiting more workers or buying new
8. Sufficient space available [k] as if not the rent
machinery a better way to increase productivity?
might increase [an]
Introducing machinery:
✓ Likely to be more consistent (k) so better quality
products made with fewer mistakes [an]
reducing the amount of rework/wastage [an]
✓ Machines do not need to rest [k] so can work for
longer periods of time/24-7 [an]
✓ Higher productivity [k] lower average cost [an]

X High cost/expensive to invest in equipment [k]

which would increase cash outflows [an] which a
small business might not be able to afford [an]
X May not have space to introduce machinery [k]
X May required more skilled workers [k] increasing
labour costs [an]
X Higher maintenance costs [k] increasing expenses
[an]
X Can become outdated quite quickly/need to
replace regularly [k]

Recruit some/additional employees:

✓ Cost/time to recruit [k]
X Training may be required [k] increase costs [an]

Eval: It is better for a small business to recruit more

employees, especially if the increase in demand t is
only temporary as the initial cost of machinery
is likely to high. Therefore, it might be safer for a
small business to wait before taking a major financial
decision to see whether the higher level of demand
can be sustained.

C18: Production 7
18.7 Production Methods
1. Job Production: single specialized product is made
at a time.
Produce a personalized product individually;
Makes one product from start to finish (before
starting the next one)
Feature: labor-intensive; highly skilled workers; high
quality, single product, flexible
✓ Can meet exact customer demands [k] so able to
charge higher price [an] in a niche market
✓ Unique / meet exact customer needs [k] can
help brand loyalty [an]
✓ Flexible [k] can easily change from one product to
another which can help them remain competitive
[an]
✓ higher motivation [k] More varied work – help in
retention - leading to fewer workers leaving OR less
absenteeism
✓ Skilled workers are less likely to make mistakes [k]
which helps ensure quality assurance so less need
for rework [an]
X Skilled labor costs more [k] which increases labour
costs [an]
X No purchasing economies of scale possible [k] buy
few raw materials [app] leading to higher AC [an]
X Production can take longer [k] f which reduces
output and productivity [an]
X Unit costs are higher in LI than CI (k) so must be
sold at higher prices
X Products are made to order so mistakes can be
expensive to correct
C18: Production
2. Batch Production: A production method where
similar items are produced together – a whole batch
moves through the different stages of production
together.
Is where a quantity of one product is made, then a
quantity of another item will be produced
The production of goods whereby each batch of
products passes through one stage of production at
the same time before moving on to the next stage.
Feature: goods made in sets ; change over time is
needed, large volume, EOS
✓ Flexible (k) easily able to change production to
meet changes in customer demand [an] so more
sales
✓ Variety of jobs to workers [k] helping improve
employee motivation [app] so fewer employees leave
[an]
✓ Allows variety of products [k] so customers have
more choices & lead to more sales (an)
✓ Spread risk [k] as they are not reliant on one
product for all sales [an] and can make variety of
products could lead to more sales (an)
✓ Allows division of labor and use of specialist skills
[k] so able to take advantage of specialization [app]
to increase output [an]
✓ Used when level of demand not too high to justify
the use of flow production [k]
✓ Larger numbers are made [k] lower unit costs
✓ Production not affected if machinery breaks down
[k] so other stages can continue OR some output
made [an]
✓ Some EOS: Allows buying in bulk [k] discounts
lower AC
X Time lost in switching machines between batches
[k] as modified batches are produced, machines are
reset between batches [k] could lead to lost output
X Added Cost of moving or storing semi-finished
goods [k]
X Inventory may be sitting around between stages
[k] increasing costs [an]
X A fault with one product is likely to affect entire
batch [k] which could increase waste
X Warehouse space to store inventory to store RM,
WIP, FG
8
Why use BATCH?
1. Level of demand not too high [k] as there
may not be sufficient demand to use flow
production for its product
2. Allows flexibility and quicker to respond to
changes in demand [k] so if one product is
more popular it is quick to adapt to another
(ap)
3. Demand is seasonal and not continuous [k]
so will use batch
4. Not enough capital to use capital-intensive
methods [k]
5. Nature of Product: if demand is seasonal,
use Batch; if demand is continuously high,
use Flow
Should Bz Change from JOB to BATCH?
Job meets exact customer demands / unique /
higher quality [k] so able to charge higher price [an]
in a niche market (ap). Both job and batch allows
varied work leads to higher motivation [k] leading to
few workers leaving / less absenteeism [an]. Change
can also damage reputation [k] for its luxury product
[app] which could lower its sales [an]
However, if there is a large increase in demand, job
production is no longer suitable. Business may have
to produce standardized products instead of
specialized to meet demand. Batch allows flexibility
to switch production so able to quickly change styles
to meet customer needs. Some EOS, leading to
lower AC. Batch is able produce more [k] which is
important as demand has increased [app] so maybe
able to meet additional demand [an]. Batch can de-
motivating for employees (as work likely to be more
repetitive) [k].
Eval: There are cost in changing process. Bz has to
purchase equipment, train workers which is
expensive. Can the bz afford? The bz needs to see if
it can meet demand using job and if can’t must
change its methods.
C18: Production
3. Flow Production: large quantities of standardized
product are produced in a continuous moving
process
feature e.g. large volumes, identical products,
continuous production, capital intensive, repetitive
tasks, inflexible, low skilled labor, fast method
✓ more output OR fast production [k] so more sales
(an)
✓ Produces 24 hours a day OR continuous
production [k] as it can be automated
✓ Allows for specialization / simple repetitive tasks
allows for greater use of cheaper unskilled labor
which is cheaper
✓ Use of CI reduces labor costs (k) have fewer
employees [k] help lower cash outflows for labor
costs [app]
✓ Continuous movement of goods along a
production line [k] so output is faster [an] without
interruption
✓ Economies of scale (k) Produce in large volumes of
so but materials in bull – discounts. Costs are kept
low [k] so might be able to reduce its prices [an]
✓ Standardized products/consistent quality (k) so can
maintain reputation (an)
✓ High Overhead spread over many units
✓ Goods can be produced quickly [k] so more sales
and help improve its cash inflows [app]
✓ Technology improves flexibility [k] so the business
can react to changes in demand [an
X Repetition of work [k] – workers could become
bored and demotivated as they are always doing the
same task [k] so less efficient [an]
X One machine breaks down the whole production
line will stop [k] so not able to meet demand
X High setup costs [k] may have to borrow money
X Inflexible (k) cannot easily change products if
demand changes [k]
X Capital intensive [k] so high fixed costs [an]pay for
repairs and maintenance
X Need access to reliable supply of materials [k] or
flow will not work effectively as the work stops while
waiting for materials.
X Workers may fear redundancy [k] as machines
replace them [an]
X Significant storage requirements [k] space needed
to store materials – higher rent costs (an)
9
Should Bz Change from BATCH to FLOW?
YES:
If selling to mass market or demand is rising, then
using flow is ideal to make more output. Flow also
leads to EOS and reduces AC- so bz more price
competitive.
NO:
Workers may become demotivated as they produce
standardized products and work is more repetitive
than batch [app] so they become less productive.
This will depend if bz can afford to pay for high costs
of flow methods. There is also more inflexibility in
flow as business cannot easily switch to meet
demand [an]. As work become automated, workers
may fear redundancy [k] as machines replace them
[an] so less employees needed [app].
C18: Production
Factors in Deciding the Method of Production:
1. Nature of Product – unique /luxury products
are tailor made and needs job production;
standardized identical products will use flow
production;
2. Level of Demand - low demand products use
job production, if D is high but not in large
quantities, batch production is used, and a
very large, steady demand will use flow
production. Small local markets or niche
markets will use job or batch production.
International markets use flow production.
3. Costs/ Availability of Funds – small firms
have less funds to afford flow methods so
use job order or batch production; larger
firms that have huge funds and can afford to
use flow production
4. Flexibility - if the bz wants flexibility and
make it quicker to respond to changes in
demand - it will use job or batch production
5. Access to suitable space: flow production
requires larger space than job production
6. Access to (suitable/skilled) employees: job
production requires skilled workers; flow
production is mostly automated and uses
unskilled workers
10
 C19: Costs
19.1 Costs Uses of Cost Data

1. Fixed Costs (overhead/indirect) - costs which do not
change with output.
Examples of Fixed Costs.(FC)
• Rent of factory: even if you produce lots of
products, the rent price will be the same
• Insurance: you set the insurance cost before-
hand
• Bank fees: interest charges are a set price; they
don’t change depending on the products
produced
• Management Salaries: they are set regardless of
production
• Staff cost (Security Admin)
2. Variable Costs (direct) – costs which vary directly with
output
• Help set prices (k) for products sold by
retailers/business (app) if the average cost is not known
the business may charge a price that leads to a loss made
for each item sold.
• Calculate profits (k) need cost data and compare with
revenue to calculate profit/ loss
• Accurate cost info is very important to managers for
future planning and decision making – help in making
budgets, CFF
• Decide whether to stop OR continue production [k] of
certain products [app] No business wants to make a loss,
but the decision to stop making a product will depend on
if its newly launched and if revenue will increase in
future.

Examples of Variable Cost:
• Raw materials: the more you produce, the more
materials you need
• Electricity & Gas: Energy is paid by use. if you are
producing more, more electricity is being used
• Shipping cost: Making more products means you
have to ship more items
• Wages: direct labor used in production
• Decide location to sell its products [k] business will
choose cheaper location to reduce FC but might not be
convenient for customers.
• Help to identify ways how to reduce costs [k] actual
data can be compared with budgeted data to calculate
variance and take corrective action

3. Total Cost = Sum of Fixed + variable costs TC = FC + VC

TR = P x Q
4. Average Cost (Unit Cost) = TC / total output Profit= TR- TC
The cost of producing a single unit of output. Profit = CPU x Qty - FC
AC = TC / Qty
5. Sales revenue : income of a business from sales of g/s Contribution = SP - VC
in a period of time. (SP X QTY) Break even = FC / CPU
Margin of Safety = Actual unit - BE units
6. Profit: surplus after all costs are deducted from TR Targeted Profit = Target Profit + FC / CPU

7. BE point: quantity that must be produced so TR = TC. SP $40

Level of output where there is no P/L VC $25
FC $10000
8. Margin of safety: Difference between current level of Units sold: 14000
output and break-even output
CPU $40-$25= $15
AC $350,000 + $ 150,000/14000= $35.71
BE $150,000 / 15 = 10000 units
MOS 14000 -10000 = 4000 units

C19: Costs 1
 19.2 Break-Even
BE point: quantity that must be produced so TR = TC
Level of output where there is no P/L
Anything before the break-even (BE) point is loss.
Anything after the break-even (BE) point is profit.
Break-Even Charts: graph that show how costs and
revenues change with quantity.
Benefits of BE charts
✓ Shows level of profit/loss at different levels of
output to help decide which product to extend/cut
✓ It can be used to show the SAFETY MARGIN – the
amount by which sales exceed the break-even point.
So managers know even if they do not hit the target
they could still make a profit
✓ Help apply for finance (k) banks use this to assess
business risks (an)
✓ Business will know level of output needed to cover
costs or breakeven, so that the business will not lose
money. If they did not know what the BE level of output
was then the business might be losing money and may
not be aware of this until the year when the profit and
loss account are calculated.
✓ Help in decision-making [k] such as how best to
increase added value [app] help set Prices (an)
✓ Helps in inventory planning (k) estimate the sales
needed to be made to cover all the costs [an] so that he
can order the right amount of materials [app]
✓ Can see what will happen to the break-even point if
costs or prices change [k] It lets managers try out
different possibilities to find out which one is the best.
(i.e. change in selling price or costs)
C19: Costs
Limitations of BE charts
✘ assume that all products made will be sold. It
does not show the possibility that inventories
may build up if they are not sold
✘ assumes Fixed costs are constant. FC only stay
the same if the scale of production stays the
same (doubling the output will also increase the
fixed cost because they must need bigger factory
✘ charts assume that costs and revenues can be
drawn with straight lines, which doesn’t happen
in real life.
✘ It assumes costs and revenue increase at a
constant rate. VC falls due to discounts, SP may
change due to competition
✘ Not easy to separate costs into fixed or
variable.
✘ Assumed selling price will remain same for all
products sold – SP may change due to
competition
✘ Assumes only one type of product is sold –
Hard to calculate when sell many products [k]
Ways to Lower BE/ Increase MOS
1. Reduce VC: cheaper materials, cheaper labor so can
reduce VC but will affect quality and motivation
2. Reduce FC: relocate where rent is cheap to reduce FC
but could be inconvenient to customers
3. Increase SP: raise P to increase CPU will lower BE but
only possible if D inelastic
2
 A. Reducing Costs B. Raising Prices

Benefits of Reducing Costs Is Raising Price Best Way to Lower BE ?

✓ Increases profit margin (k) more profits (an) more YES

dividends for shareholders (an)
✓ Less cash flow (k) can improve business liquidity
✓ Increase efficiency [k] so less wastage of resources
✓ Remain competitive (k) firms can lower prices and
meet more customers orders
Ways to Reduce Costs
• Use cheaper supplier to reduce VC but could mean
poorer quality goods [k] might affect reputation(ap)
• Replace workers with machines to reduce VC, but does
bz have finance to buy new machines? Need to pay costs
of making workers redundant
• Raise price will increase revenue [k] higher CPU so can
sell few goods to recover FC [app]. This can be done only
if D inelastic, increasing P will have a small decline in D. If
D is elastic, increase P will see a greater fall in demand.
NO
• Increase P depends on actions of competitors [k] as it is
a competitive market [app] possible loss pf customers to
rivals (an)
Evaluation: Is the business able to lower costs so it does
not need to increase P? Other ways to lower BE are:
Lower costs of materials or labor [k] might mean quality
of work is reduced [an] so loose customer loyalty [app].
Increase in P will depend on elasticity of demand.

• Buy in bulk to benefit from EOS [k] reduces VC (an)

• Sell online [k] so lower fixed costs such as rent Is Lowering Price Beneficial ?

• Relocate where rent is cheap – reduces FC but could YES:

• More affordable [k] so will result in more sales
affect sales
• If product is price elastic [k] there is a greater increase
in sales (an)
• Use JIT [k] so only order materials needed to reduce
• Lower price should increase volume of sales [k] as
wastage [an] save storage and insurance
better able to compete with other products [an]
• Use Kaizen (k) change way the work is organized to
NO:
increase efficiency – save rent
• Reduces profit margin per unit [k] reduce CPU (an)
increase BE output [an]
• Reduce Advertising: reduces FC, lowers marketing
• Cheaper price might suggest inferior quality [k]
budget but less awareness
therefore less sales [an]
• Lead to a price war [k] as competitors may respond by
• Pay lower wages: keep VC low but can cause
demotivation cutting their prices [an] sales remain the same or fall (an)
• Cut in profit [k] if sales do not rise [an]
• Better machinery [k] which could improve productivity • Depends on capacity (k) bz not able to make extra
[an] quantity
• No impact on sales (k) people may be loyal to other
brands so no effect on sales (an)
Effects of Increasing P Effects of Lowering P
EVAL:
Whether it would benefit the business would depend on
• Increases revenue • Decreases CPU
how much the firm could increase production [ev] and
• Increases profit margin • Increases BE
how much sales rise. If sales volume does not prove price
• Increases CPU • Decreases MOS
elastic [k] then the business will be financially worse off
• Reduces BE • Decreases revenue
[ev].
• Increases MOS • Decrease profit margin

C19: Costs 3
 19.3 Economic of Scale
EOS: factors that reduce AC as business increases its scale
of operation
1. Purchasing economies - business buys in bulk and
receive discounts decreasing the average cost so able to
lower prices and be more competitive
2. Financial economies- large manufacturer have easier
access more sources of finance as seen as lower risk so
negotiate lower interest rates
3. Managerial economies - Large firms can afford to hire
specialists who will help reduce wastage, increase
efficiency & productivity
4. Marketing – large firms can advertise for goods and
buy vehicles to distribute its product. Marketing [k] cost
are spread over more products, so cheaper per unit
5. Technical economies –Large firms can afford
technologies, R/D , flow production which are efficient.
The high costs are spread over more products [app] so
lower AC
6. Risk bearing [k] large firms produce more than one
product so if there are problems in one item, they have
others to rely on [app] Large bz also operate in more than
one market (k) if problem in one, they have other to rely
on (an)
DEOS: factors that lead to increase in AC as business
increases its scale of operation (low morale, slow DM,
poor communication, control issue)
1. Poor Communication [k] difficult to send and receive
accurate messages across many levels, or in different
locations messages are delayed or distorted can cause
serious mistakes and poor decisions (an) which lead to
lower efficiency and higher average costs (an). Difficult to
hold meetings to keep everyone informed.
2. Low motivation [k] In larger firms it is difficult to
establish close relationships between workers and top
managers - workers feel unimportant and not valued by
management can lead to a lack of commitment and low
efficiency will push AC upwards (an) Unhappy workers
may leave and cause high labor turnover [an].
3. Poor coordination (k) Large businesses have longer
chains of command – decisions taken by managers take
long to reach all parts of a large business and different
groups of workers. This could make it difficult to
coordinate the work and decisions of all parts of the
business and ensure that they are working towards the
same objectives
C19: Costs
Factors in Deciding Scale (SIZE) of Production
• Finance (k) does business have adequate funds for
more resources (app) to make more goods
• Access to sufficient supplies [k] if there is a shortage of
materials [app] might not be able to meet orders [an]
• Labor issues e.g. need to recruit/train more workers [k]
to make more products [app] adding to expenses [an]
• Market demand [k] is increase in D permanent or
temporary? (an) if demand rises quickly [app] and tastes
change again bz could be left with unwanted inventory
[an]
• Storage issues e.g. have they sufficient storage space
[k] as already have high levels of inventory [app] as may
need to rent additional
• Quality issues e.g. are they able to check standard [k] of
products made [app] may rush to meet demand
• Machinery issues (k) is there enough machinery to
allow for expansion?
Is EOS the most important reason for Taking-over
another business?
YES
• Possible purchasing economies of scale (k) two firms
will bulk buy[k] leading to lower average costs [an] which
could allow for lower prices [an]
• Reduces competition [k] which could increase market
share [an] and therefore increase revenue [an]
NO
• EOS may not be possible to achieve [k] The business
can become too large and may experience diseconomies
of scale [an]
EVALUATION
It depends the business’ objectives [eval] if take-over a
direct competitor can increase market share which is
more important than economies of scale.
4
 Do you thinks it is good to grow quickly?
Do you thinks profits rise as business expands?
Problems of Increasing Production
Does Expansion Leads to Lower AC?

PROS of EXPANSION EVALUATION

✓ Expansion will reach more people (k) the bz needs to
expand to meet requirements and increase sales (an)
✓ Growth increase profits (k) possible expansion can lead
to EOS reduces AC and increases profit margins (an)
✓ EOS, AC falls (k) Lower prices can be charged [k] which
might increase the number of sales [an]
PROBLEMS of EXPANSION
Growth of a business will result in increased sales
revenue [k]. Assuming margins are constant this must
result in higher profits [an]. Sales revenue of the business
should increase [k] but expansion creates extra costs [k]
such as the additional rent so profits may not increase
[an]. If sales rise by more than the additional costs than
could be more profitable [eval].

X Need to hire more workers [k] who can make

products[app] so increase costs [an]
X Financial – could ask the bank for a loan to help
purchase [an] time [an]
X CF problems [k] as need to buy additional materials
[app] so try to apply for more credit limit [an]
X Additional machines might be needed [k] as not
enough equipment to produce the additional output
X Higher maintenance costs [k]: if machines are used
more they could break down more often so need to
spend more keeping them working [an]
X Additional costs of training [k]
X Lack of capacity to meet demand [k] as factory might
be too small to hold all materials and finished stock
[an] so might not have room to expand at this site [an
X Overwork current workers [k] which could lower their
motivation [app] so higher labor turnover
X Quality may suffer when bz rush to meet demand [k]
so not able to check all the products [app] which could
damage reputation [an] leading to fewer sales
X Need to have higher levels of stock [k] which
increases cash outflows [an]
X Possible DEOS, e.g. poor communication [k] as likely to
have more employees to instruct [an] so existing
methods of communication might not be effective [an]
X Supply problems (k) can suppliers keep up with orders
[k] as product range doubled [app] they will need extra
materials [an]
X Communication problems [k] as likely to have more
employees to instruct [an] so existing communication
methods not effective
X Location issues: distribution problems [k] they may be
unable to get ensure products get to customers

C19: Costs 5
 C20: Quality
Quality – to produce a good or a service which meets
customer expectations
Importance of GOOD Quality
✓ Good brand image [k] so customers trust the
product[app] could help increase sales [an]
✓ Builds brand loyalty (k) which could lead to repeat
purchases (an)
✓ Increase sales [k] through more recommendations [app]
and customers will not will find alternatives [an]
✓ Attracts new customers (k) quality product have
better reputation than rivals so increase sales (an)
✓ Set higher prices (k) quality products are sold at high
prices (ap) so more added value and higher profit
margins (an)
✓ Can become USP- Can charge higher selling price [k]
which might have helped increase its profits [an]
✓ Must meet legal requirements (k) product are safe
(ap) to avoid fines and law suits (an)
✓ More competitive [k] quality can give business a
competitive advantage over its rivals [an]
✓ Reduce wastage [k] no need for rework faulty products
which will help reduce costs [an]
✓ Fewer complaints (k) less products returned (ap) No
need to replace faulty products [k] which will help
reduce costs [an] less materials wasted (ap)
✓ Less mistakes [k] so people trust the product
Success of business is not only dependent on quality
but also other factors such as competition, changes in
consumer spending patterns, prices, promotion etc
Methods to Maintain Quality
• QC [k] by checking products before they leave the
factory [app] so ensure that all finished products are
up to standard [an]
• QA [k] so errors are prevented before they happen
[an] so product is defect free [app]
• Introduce TQM system / quality circle / Kaizen [k]
workers involved in improving quality and giving
suggestions
• Better quality materials [k] to make the products
[app] but increase bz costs
• Train employees [k] so able to complete tasks with
less errors [an] so able to produce better products
[app]
• Recruit skilled workers [k]more efficient but
expensive (an)
• Increase motivation e.g. use job enrichment [k]
• Update machinery [k] CAD CAM
C20: Quality
Problems of POOR quality:
X Loss of existing customers (k) so less
sales [an] as customers look for alternative to
other brands – loss of sales (an)
X Rise in repair costs [k] Have to replace faulty
products or repeat poor service which raises
costs for business and lead to lower profit [an]
increases waste (an)
X Have a bad reputation (k) because people who
have bad experiences will tell other people, etc.
so sales may fall (an)
X Leads to lower sales (k) inability to supply on
time [k] as products are re-worked so could lose
important future orders [an] leading to more
complaints [app]
X Cost of fines/legal action [k] as poor quality
may break laws [an] bz have to pay for damage
caused to customers (an)
X Cannot charge higher prices [k] less added
value so lower profits
1. Quality Control – Process of checking for quality at
the END of the production process.
QC hires a quality inspector to check for defects.
✓ Eliminates errors (k) reduces likelihood of customer
getting faulty product so improves reputation (an)
✓ Less training costs (k) all workers do not need to be
trained for QC as inspectors are hired to check
quality (an)
✓ Production does not stop (for check) (k) as workers
concentrate only on making not checking quality (ap)
more efficient – ensures more output is made
X Expensive (k) as inspectors need to be paid to
check the product increases labor costs (an)
X Increased wastage (k) faulty products have to be
scrapped or re-worked (an)
X Does not identify where / why the fault has
occurred [k] so it is difficult to remove the problem -
vulnerable to repeating the errors (an) identify at the
end – increases VC
X Does not encourage employees to be responsible
for quality [k] leading to more faults in products [an]
X Does not check all products (so customers may still
receive poor-quality products) [k] damaging
reputation [an]
1
 2. Quality Assurance –checking for the quality standards
THROUGHOUT the production process by the employees.
It will make sure quality standards are set
and then it will apply these quality standards at every
stage. Quality assurance is process orientated
✓ Eliminates faults at each stage before
customer receives product so less money spent on
rework
✓ Fewer customer complaints (k) improves bz
reputation (an)
✓ Reduced waste (k) less products are scrapped or
re-worked which improves efficiency (an)
✓ Encourages teamwork (k) QA means everyone is
involved in checking which motivate all employees (an)
✓ Do not need to hire inspectors [k] reduce inspection
costs (an)
✓ Errors spotted (k) Allows business to know at what stage
mistakes happen so less chance of repeating mistake (an)
improves efficiency (an)
✓ Can motivate employees (as have an important role
in process) [k] leading to higher output / fewer
mistakes [an]
X Expensive (k) all workers need training to check
products
X Relies on employees following instructions of the
standards set by company (k) Not all workers are
interested/able to spot problems [k] need cooperation
of all workers for QA to work
X Time and costs to train all workers [k] may reduce output
(in short term) [an]
QC QA
Check at the END Check throughout the
process
Bz hires inspector to check Every employee is involved
quality in checking
Product Oriented Process Oriented
C20: Quality
3. Total Quality Management (TQM) – the
continuous improvement of products and processes
by focusing on quality at each stage of production
• Workers are involved in accepting
responsibility for a quality good. It is closely
linked with Kaizen and the use of quality
circles. Quality circles are where groups of
workers meet regularly and discuss problems
and possible solutions. Workers are
encouraged to suggest new ideas to reduce
waste and ensure zero defects.
• Quality is maintained throughout the
business and no faults should occur. It tries
to “get it right the first time” and have no
defects
• It focuses on ensuring 100% that the
customer is always satisfied. Customer is not
just the final user, it also includes other
people and departments within the business
✓ Quality is built into each part of the production. It
becomes a habit for the employees
✓ Eliminates virtually all faults before the customers
receives product as it has the ‘right for the first time’
approach
✓ No customer complaints so the brand image is
improved (k) so increase sales (an)
✓ Waste is removed and efficiency increases which
means less money is wasted (higher profits)
✓ Reduced costs (k) products don’t have to be
scrapped or re-worked or service repeated
X Very expensive to train employees to check the
product or service at every stage of production
X Relies on employees committed to maintaining the
standard
2
 C21 Location
A. Factors Affecting Manufacturing
1. Cost of land: large manufacturing bz will need
large space to build. May locate in outskirts to save
fixed costs. High cost will restrict factory size and
output.
2. Near Customers: Perishable/fragile products or
those that gain weight in production will be near to
customers to reduce transport costs and ensure
sales are made
3. Near Material: for business that use perishable
materials and heavy raw materials which are
expensive to transport will locate near source of
supply. Flow production is on large scale will locate
near suppliers to avoid delayed production.
4. Available Labor: LI business that need large
number of workers will locate in area of high UE to
keep labor cost low. If skilled labor is required, bz
will set up where relevant skills live to save on
training costs
Why is labor important?
• Skilled labour may be difficult to find/ [k]
which could increase labour costs [an]
• LI requires access to labour [k] without
labour they cannot operate [an]
• Can depend on type of workers required (k)
unskilled workers may be easy to find [an]
• Labor not so crucial if firm is CI, other
factors would be of greater importance
5. Government Influence: grant / legal controls [k]
which may influence or restrict where the business is
allowed to operate [an]
6. Legal Controls: government may impose
restriction where and how a business operates
• May not able to locate in certain places [k] so
no output made[an]
• Bz may have to change its production
methods [k] which will increase costs [an]
• May restrict amount business can export/
import [k] reducing potential sales [an]
C21: Location
7. Transport Network: to ensure products arrive / sent
when needed [an]
8. Power and Water Supply: bz will locate where it has
access to utilities e.g. power, water, internet to
ensure smooth production, otherwise it well need to
install power etc. will add to costs –all could lead to
lower margin
9. External EOS: business will locate in area with
support businesses
B. Factors Affecting Service Business
1. Near Customers: services where direct contact
between the business & the customer is required
will locate near customers to ensure sales are
made
2. Owners Preference: owners locate their business
near to where they live.
3. Access to Labor: if a particular type of skilled labor
is required then it may locate near to where this
labor is found or would have to train staff to offer
good service.
4. Cost of Rent: The more central the site of the
premises, the higher the rent. Many service bz
business locate on the outskirts of town to benefit
from lower rents and taxes.
5. Security: High rates of crimes such as theft and
vandalism may deter a business from locating
in a particular area.
6. Customer parking: Where parking is convenient, it
will encourage shoppers to visit that area and
therefore possibly increase sales.
7. Near other shops: locate near to shops which are
visited regularly so that a lot of potential consumers
pass the shop on the way to other shops
8. Proximity to rivals: several competitors in the
area may lead to more customers coming. However,
customers might be loyal to other business so
difficult to gain customers, may have to lower prices
9. Power and Water Supply: bz will locate where it
has access to utilities e.g. power, water, internet to
ensure smooth delivery of service
1
C. Factors Affecting Retail Pros/Cons of Opening in Cheap Location

1. Near Shoppers: retailers want popular area, such
as a shopping mall to ensure sales
2. Cost of Rent: The more central the site of the
premises, the higher the rent, increases fixed costs.
3. Product Image: Location has to match its brand
image [k] The type of shopper an area attracts will
also influence the attractiveness of the area to
particular types of retailers. If a retailer sells
expensive goods, it needs to be in an area where
people on high incomes might visit; if the goods are
small gifts, the retailer might want to be in an area
visited by tourists.
4. Near other shops: locate near to shops which are
visited regularly so that a lot of potential consumers
pass the shop on the way to other shops
5. Proximity to rivals: near competitors means more
footfall so more customers coming. However,
customers might be loyal to other business so
difficult to gain customers, may have to lower prices
6. Customer parking: Where parking is convenient
and near to the shops, it will encourage shoppers to
visit that area and therefore possibly increase sales.
✓ Reduce rent, save FC
X Far from customers (k) more businesses likely to
be located in city centre so lose out customers to
rivals (an) loss of sales (an)
X Workers unavailable (k) difficult to get right people
X Affect image [k] central location will help them
attract potential customers [an]
Is it better to open Shops where there is no
competition?
✓ Able to gain more customers: no risk of brand
loyalty to another business, so increase in (potential)
revenue/market share [an]
✓ Lower promotion costs [k] reduce expenses which
can help improve its profit margin. [an]
✓ Able to set higher prices (as no one to compete
against) [k] leading to higher revenue [an]
X May indicate low demand: few or no customers
available [k] so difficult to break-even [an]

7. Security: High rates of crimes such as theft and Is it better to open Shops where there is
vandalism will make customers not want to come. competition?

8. Legal controls: In some countries there may be ✓ attracts customers to the popular area – many
laws restricting the trading or marketing of goods in people pass-by so increase sales
particular areas. Must follow legal control otherwise ✓ gain info about rivals: can see competitors’ prices,
can create bad reputation. products sold, etc.

9. Near suppliers (k) can get goods easily and save X rivals may attract customers to them – lose
on transport costs (an) business
X price-cutting competition, lower profits.

Pros/Cons of Opening in City Centre

✓ Many people passing/close to customers [k] to

could increase possible revenue [an] higher footfall
(more customers in the area)
✓ Prestige [k] ideal for luxury products to sell in city
centre to keep its image to attract its target market
[an]
✓ Good infrastructure, e.g. electricity, internet,
transport links [k] so customers can get there
without any difficulty [an]

X Cost/availability of suitable land [k] which is likely

to be more expensive [an]
X High competition [k] so might not gain as many
customers [an]
X Government regulations [k] could stop them from
opening in some congested locations [an]

C21: Location 2
D. Locating Abroad
Factors that influence decision of country
1. Near Customers: to ensure sales are made and
save on transport costs
2. Cheaper Materials: locate near source to reduce
transport costs
3. Labor costs: LI businesses will locate overseas to
reduce wage costs – lower VC
4. Rent and Taxes: business to relocate to
countries where rents or taxes are lower to save
on fixed costs
5. Government Incentive: businesses want to
locate in countries that offer grants, subsidy to
reduce FC
6. Transport Network: to ensure products arrive
/ sent when needed [an]
7. Legal Controls: government may impose
restriction on business
• May restrict/not able to locate in
certain places [k] so no output
made[an]
• Business may have to change its
production methods [k] which
will increase costs [an]
• May restrict amount business can
export/ import [k] reducing
potentialsales [an]
C21: Location
21.3 MNC
Multinational businesses (transnational)
business with factories, production or service
operations in more than one country.
Benefits of being MNC (C29)
✓ Closer to customers (k) reduce transport costs
✓ Lower production costs: produce goods
in countries with low costs, such as low
wages - remain competitive
✓ Spread risks: Not reliant on one market for
all its sales If there are low sales in one country
and high sales in another
✓ Increase sales: access new customers - can
increase revenue [an]
✓ Nearer to raw materials (k) cheaper,
reducetransport costs
✓ Avoid trade barriers (k) quotas and tariffs will
notapply if the business is not moving goods
between countries
✓ Gain government grants (k) will reduce costs
ofproduction (an)
✓ Reduced tax liability: take advantage of
favorabletax rates
✓ Improve brand image (k) lead to brand loyalty
✓ Economies of scale, e.g. purchasing EOS – lead
tolow AC
X Language problems: could lead to mistakes
X Impact of exchange rates [k] which may
make itdifficult to set budgets [an]
X Difficult in ensuring quality [k] in each
location which could damage reputation [an]
X Different legal controls (k) so not able to
have same rules in all its factories (an) may
have to change how/where operate [an]
X Long distances involved [k] as difficult to use
same supplier [an] affect product quality
X Problems with control and management
X Lack of skilled workers [k] may need
skilledworkers [an] higher training costs
X Different countries have different tastes [k]
difficult to sell same product (an) leading to fewer
sales [an]
X Trade barriers: tariffs can increase cost of
imported materials (an) make it less competitive
3
Impact of MNC on Stakeholders
1. Shareholders: receive increased dividends from
higher profit.
2. Employees: increased opportunities to gain
promotion as the business gets larger and has
operations across many countries; opportunity to
live and work abroad.
3. Suppliers: increased or decreased sales to the
MNC depending where it operates and is located.
4. Government: gain higher tax revenue if profits
from operations abroad are repatriated, or it may
lose tax revenue if the MNC locates its head office
elsewhere.
5. Customers
✓ Access to international brands [k] so more
consumer choice [an] so better able to find products
that suits their needs (an)
X Fewer choices [k] so smaller producers forced out
of business [an] so prices may increase
21.2 Government & Location
Why do governments to influence location
Decisions?
• To encourage businesses to set up and expand in
areas of high unemployment
• To discourage firms from locating in overcrowded
areas or on sites which are known for their natural
beauty.
Government measures to influence locations:
1. Planning regulations legally restrict the business
activities that can be undertaken in certain areas.
2. Government grants or subsidies to encourage firms
to locate in undeveloped parts of the country
C21: Location
Impact of MNC on HOST COUNTRY
✓ Jobs are created, improves SOL, reduces UE
✓ Increased investment – the new factory will create
jobs to build it and new infrastructure may be built
also benefiting local businesses
✓ Increased exports – some of the extra output may
be sold abroad, which will increase the exports of
the country. Also, imports may be reduced as more
goods are now made in the country (improve BOP)
✓ Pay taxes, which increases government funds
✓ Increased consumer choice – there is more
product choice for consumers and more competition
– better quality, lower prices
✓ Improved country’s international reputation (k)
which could encourage other businesses to invest in
their country [an]
✓ Local business gain sales (k) MNCs order local
supplies (k) increase local incomes (an)
✓ Provision of training [k] develop local expertise
teach new skills to local [an]
X The jobs created are often unskilled assembly-line
tasks – low paid. Skilled jobs, such as those in
research and design, are not usually created in the
‘host’ countries receiving the multinationals.
X Reduced sales for local businesses – local firms
may be forced out of business. MNC are often more
efficient and have lower AC than local businesses.
X Profits Repatriation– profits are often sent back to
a MNC ‘home’ country and not kept in the country
where they are earned – limiting country growth
X Use up scarce resources in the host country so less
available for local bz
X Offer higher wages [k] reducing supply of workers
for local business [an]
X The multinational business could have a lot of
political influence and gain concessions
such as grants that could have been spent on local
businesses
X Increased noise and air pollution when the factory
is being built – may cause damage to the environment
and health of the local population
Sample:
MNC pay taxes [k] which increases government
income [an]. However, reduced sales for local
businesses [k] may lead to lower revenue [an]. A
MNC always benefits a country to some extent,
because of the money invested. [eval] The overall
impact depends upon the effect on local businesses.
[eval]
4
 Manufacturing Service Retail MNC
near raw materials near competitors near competitors Near customers
skilled labor near customers near customers near raw materials
cheap labor access to labor product image cheap labor
govt regulations rent costs cost of rent cost of rent
closer to market owner’s preference customer parking govt incentive
land costs government law security legal controls
transport network security transport network
utilities customer parking
power supply

C21: Location 5