¡Descarga Company Size and Costs: Technological, Sales, Finance, Management, and Risk Points of View y más Apuntes en PDF de Administración de Empresas solo en Docsity! 3: Company Size BUSINESS ECONOMICS Guillem Crosas 1 3.1 Company size 2 Company Size Sales point of view • If the market is huge, the company size must cover the market • Small and medium-‐sized companies usually compete in small markets, because these companies cannot afford to grow • So the market size kind of tells us the company size 5 Company Size Finance point of view • The bigger the company is, the easier to find finance support from banks and Government • If the company is small, financial insOtuOons won’t trust in the company’s prospects or its ability to meet its commitments • So if a company needs to find financial support, it’s structure and size must be as stable and big as possible 6 Company Size Management point of view • Small companies have easier and less complicated managements • When a company grows, its management must evolve and be more organised and have a stronger hierarchy • Many companies have soZer managements when they grow, and this is one of the most common reasons for failure to grow 7 Costs Basic concepts Cost (coste): Goods and services consumed – can be evaluated in terms of money Expense (gasto): Payment for goods and services The expense (or payment) may not occur at the same Ome as the cost (the consumpOon of the goods or services) 10 Costs Fixed costs • Don’t depend on sales • Exist even when the company is not producing • Examples: – Set-‐up costs – Local rental – Salaries of administraOve staff – Minimum power rented – Etc. 11 Costs Variable costs • Depend on units sold • They only exist when we are producing and selling goods • Examples: – Raw materials – Workers’ salaries – Direct power costs – Machines needed to produce the goods – Etc. 12 Costs Break-‐even point We have total costs (Fixed + Variable) We also have total revenue (units x price) The break-‐even point is the moment when our revenue and costs are equal: TC (Total Costs) = FC + VC = TR (Total Revenue) = p x Q (Price x Quan>ty) BeP units = (FC) / (p – VC*) BeP money = (FC x p) / (p – VC*) 15 Break-even point
$ Unit price
Costs
S Sales revenue
A Break-even level
of sales
$ Total costs
S Fixed costs
H Sales volume
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Costs ContribuOon Margin (CM) • The variable costs are the cost we have per unit of producOon (VC = VC* x Q, where Q is the quanOty of producOon) • The VC* is the variable cost per unit • The price (P) is the amount of money we receive per sold unit • The ContribuOon Margin is the difference between price and VC*: CM* = p (price) – VC* (variable cost per unit) 17 Economies of Scale When a company increases its producOon, it usually gets beker prices, and in general is able to reduce unit costs. 20 Economies of Scale The best way to describe economies of scale is with Hoover’s principles: a) Principle of mulOples b) Stockpiling principle c) Large quanOOes operaOons principle Which try to explain why increasing the company size leads to lower costs 21 Economies of Scale a) Principle of mulOples It’s based on the imperfect division of producOve factors (mechanical machines, buildings, etc.) If we increase the outputs (producOon), we’ll divide the cost of the producOve factors by more units, and have lower costs. No-‐load operaOons costs: Costs that we have because we are not using our equipment at maximum level. Appear because of under-‐uOlisaOon. 22 Economies of Scale a) Principle of mulOples The soluOon: We have to calculate the minimum common mulOple: MCM (100, 200, 300, 500) = 100*2*3*5 = 3000 Number of A machines = 3000 / 100 = 30 Number of B machines = 3000 / 200 = 15 Number of C machines = 3000 / 300 = 10 Number of D machines = 3000 / 500 = 6 25 Machine A Machine B Machine C Machine D 100 units / day 200 units / day 300 units / day 500 units / day Economies of Scale b) Stockpile accumulaOon principle 26 Companies always have stocks to cover possible problems Stocks are not proporOonal to producOon Big companies have a smaller % of stocks than small ones Big companies have lower costs due to stockpile accumulaOon Economies of Scale c) Large quanOOes operaOons principle 27 • The more we buy, the less we pay (per unit) • The more we produce, the beker we are producing (lower Omings) • The more we produce, the more we learn (beker quality) • Etc. Economies of Scale DOL or Degree of OperaOng Leverage (Grado de Apalancamiento OperaOvo or GAO) 30 Economies of Scale COVERAGE COEFFICIENT Coverage Coefficient (CC) p = Price VC* = Variable unit Costs We can express the break-‐even point as (in money): 31 Economies of Scale DOL (GAO) and the break-‐even point 32
