Measuring & Increasing Profit
- Created by: Nadia
- Created on: 27-04-13 17:58
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- MEASURING & INCREASING PROFIT
- WHY IMPROVE PROFIT?
- Earn better returns for investors
- Stop the business from suffering from losses
- Improve internal sources of finance
- Provide a better return on investment made in new products of capacity
- WAYS TO INCREASE PROFIT
- Increase quantity/raise prices
- Reduce VC per output
- Increase output (economies of scale)
- Reduce overheads
- SELL MORE VOLUME
- WHY?
- Higher volumes = higher revenue (if SP is not lowered)
- Better use of production capacity (if FC do not rise)
- May result in higher market share
- WILL IT WORK?
- Depends on elasticity of demand
- Sales value may fall if price has to be lowered
- Does business have capacity to sell more?
- WHY MIGHT IT FAIL?
- Competitors likely to respond
- Marketing efforts may fail - e.g promotional campaign that does not generate results
- FC might rise - e.g higher marketing
- WHY?
- INCREASE SELLING PRICES?
- WHY?
- Higher price = higher sales (if quantity sold does not fall)
- Customers may perceive product as higher quality
- No need for extra capacity
- WILL IT WORK?
- Depends on elasticity of demand
- Sales value may fall price rise is matched by an even bigger fall in quantity in quantity sold
- Will work if customers remain loyal
- WHY IT MIGHT FAIL?
- Competitors likely to respond (e.g prices lower)
- Customers may decided to switch to competitors
- WHY?
- INCREASE PRODUCTION OUTPUT
- WHY?
- Provides greater quanttity of products to be sold
- Enables business to maximise share of marker demand
- Spreads FC over a greater numberof units
- WILL IT WORK?
- Yes, If the extra output can be sold (e.g finding a new market,offering lower price for a more basic product)
- Yes, If the business has spare capacity
- WHY IT MIGHT FAIL?
- Dangerous option - if demand is not there?
- FC may rise (e.g stepped FC)
- Production quality might be compromised in the rush to produce more
- WHY?
- REDUCE FC AND OVERHEARDS
- WHY?
- A drop in FCfeeds directlyto higher profits
- Reduces the break even output
- Potential for substantial savings which can be sustained
- WILL IT WORK?
- Yes, provided cost cuts don't affect quality,customer service or output
- A business can nearly always find savings in overheards
- WHY IT MIGHT FAIL?
- Might reduce the businesses ability to increase sales
- Intangible costs -e.g lower morale after making redundancies
- WHY?
- WHY IMPROVE PROFIT?
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