Unit 1: Exploring Business Activity Private Sector Aims

Introduction: Influenced by shareholders and other owners 4 main strategies: Break-even Survival Profit maximisation Growth

Break even: Essential for short term survival Must consider both variable and fixed costs Variable costs vary directly with the number of items produced or sold Fixed costs are the costs of running the business, regardless of how many items are produced or sold Examples of variable costs: Raw materials Staff wages Examples of fixed costs: Rent Local business taxes Fuel bills Insurance Managers salary

Break-even analysis: Can be calculated in 2 key ways: Break-even formula Break-even graph To calculate break- even point the following information is required: Selling price of product Fixed costs Variable costs per unit of production

unit sales price – unit variable cost Break-even formula: Fixed costs/unit sales price – unit variable cost fixed costs unit sales price – unit variable cost

Example: College trip to amusement park: Selling price of tickets = £15 each Fixed costs (coach, driver, fuel) £300 Variable cost (meal included £5 per student) Capacity (maximum 40 students on the coach)

Example (cont…) fixed costs unit sales price – variable costs £300 £300 (£15 - £5) £10 =30 units (tickets) Therefore, in order to break even, 30 tickets must be sold. The break even point can also be calculated as revenue, e.g. 30 tickets sold at £15 each = £450. If less than 30 students travel there is a loss, if 30 travel the trip will break even, if more than 30 travel there is a profit

Break-even point: Output/ tickets Fixed cost £ Variable cost £ Total cost Sales revenue £ Profit/(Loss) 300 (300) 10 50 350 150 (200) 20 100 400 (100) 30 450 40 200 500 600 The table gives the data for the break-even graph, showing the point at which break-even is reached and indicating profit and loss points.

Break even cont… Breaking even, is however, not a suitable long-term business objective When a business calculates its break-even point, it will be looking beyond this to identify how much profit it can generate

Activity: Using the figures provided, work out the break-even point for the following example: Café Smoothie sells luxury smoothies Selling price £3 each Fixed costs £20,000 Variable costs £2 per smoothie If the business is open for 50 weeks per year, how many smoothies will they need to sell per week?

Survival: UK high street business that have survived: Marks & Spencer and WH Smith; these businesses have had to fight for survival How has M&S survived & increased profits? M&S has survived by: Changing its name to M&S from Marks & Spencer Creating new attractive store layouts Carrying out successful advertising using top models and celebrities, e.g. Twiggy, Elizabeth Jagger, Mylene Klass, Peter Kay

Profit maximisation: Often seen as main objective of business But businesses have different short term objectives in order to achieve this in the long term Example: To be market leader, business might have to invest heavily in short-term = short-term profits fall By sacrificing short-term profit maximisation, long term profit growth can be secured

Growth: Businesses can grow by: Growing existing sales Growing into new markets Increasing number of retail outlets or production facilities Increasing number of employees or resources used Expanding into overseas markets Internal/external growth Internal growth – using profits to expand the business from within External growth – joining together with other businesses either through mutual agreement (merger) or by takeover (buying up at least 51% of the shares of the other business)

Conclusion: There are many strategies that a private sector business can employ in order to meet their aims and objectives Overall, their main aim will be to maximise profits, however, other short term objectives may be more important at different times in order to reach this aim