AQA BUSS2 Topic 2 - Measuring & Increasing Profit 0.0 / 5 ? Business StudiesFinancial PlanningASAQA Created by: chelsiethayneCreated on: 02-06-15 16:28 Why businesses should aim to improve profits Earn better returns for investors Stop the business from suffering losses Improve internal sources of finance Provide a better return on investment made in new products or capacity 1 of 6 Ways to increase profit Sales: increase quantity sold or raise prices Less variable costs: reduce variable cost per unit Less fixed costs: increase output (economies of scale) and reduce overheads 2 of 6 Strategy - try to sell more volume Why? higher volumes = higher revenues if selling price is not lower better use of production capacity i.e. fixed costs should not rise may result in higher market share Will it work? depends on elasticity of demand sales value may actually fall if price has to be lowered does business have capacity to sell more? Reasons why it may fail: competitors are likely to respond marketing efforts may fail e.g. promotional campaign does not generate results fixed costs might actually rise e.g. higher marketing 3 of 6 Strategy - 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 price elasticity of demand sales value may actually fall if price rise is matched by an even bigger fall in quantity sold will work if customers remain loyal Reasons why it may fail: competitors likely to respond e.g. prices lower customers may decide to switch to competitors 4 of 6 Strategy - increase production output Why? provides greater quantity of product to be sold enables business to maximise share of market demand spreads fixed costs over a greater number of units Will it work? yes if the extra output can be sold yes if the business has spare capacity Reasons why it may fail: a dangerous option - what if the demand is not there? fixed costs might actually rise production quality might be compromised (lowered) in the rush to produce more 5 of 6 Strategy - reduce fixed costs & overheads Why? a drop in fixed costs feeds directly into higher profits reduces the break-even output potential for substantial savings which can be sustained Will it work? yes, provided costs cut doesn't affect quality, customer service, or output a business can nearly always find savings in overheads Reasons why it may fail: might reduce ability of business to increase sales intangible costs - e.g. lower morale after making redundancies 6 of 6
Comments
No comments have yet been made