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Cost effectiveness
• One of the main ways a business can become cost effective and therefore competitive to have reduced variable costs.
• Firms can use cheaper materials or they can become as efficient as possible by raising productivity
ProductivityThe amount that can be produced with the
resources available.Its all about reducing costs per item
produced
LABOUR PRODUCTIVITY =
TOTAL OUTPUTNUMBER OF WORKERS
EXAMPLE
In 2009, 100 workers produce 500 t-shirts per hourProductivity: 500/100 = 5 t-shirts per worker per hour
In 2010 the same workers produce 600 t-shirts per hourProductivity: 600/100 = 6 t-shirts per hour
WHICH IS BEST FOR THE BUSINESS?WHICH YEAR HAS THE LOWEST PRODUCTION COSTS?
WAYS OF INCREASING PRODUCTIVITY
TRAININGExpensive at first but can increase skills and speed of
workers, they make less mistakes and therefore less wastage and more produced per worker
BETTER EQUIPMENTCan reduce time to undertake tasks, fewer staff needed can
reduce costs
MORE EFFECTIVE WORK PRACTICESCan reduce waste and find more efficient ways of production
REMEMBER………….
Increasing productivity is not achieved by taking on more staff, it is achieved by getting staff to produce
more in the time given.
You can of course take on more staff, this will allow you to produce more BUT that does not mean that the
productivity per person increases.
OTHER METHODS OF REDUCING COSTS
WAYS OF REDUCING COSTS
METHOD PROBLEM?Buy cheaper raw materials Although variable costs are
reduced, they might be of lower quality and dissatisfy customers
Relocation to a cheaper site
Fixed costs reduced, but is this convenient for customers?
Cutting overhead costs – eg. Staff wages, power
Could effect staff motivation, may inmpact on ability to met customer needs