Placeholder image

Unit 4: Operations Management

IGCSE Business Studies revision

IGCSE business studies methods of production

Production and Productivity

Measuring Production

We can measure production by volume (units produced) in total, or as an average. Production is defined as the level of output produced by a company

Measuring Productivity

Productivity is measured as the amount of units produced by one worker or machine. The greater the amount, the greater the productivity. To do this we use the following formula:

IGCSE productivity

This gives us the Average Productivity of Labour. So, if 100 workers produced 500 goods, then the Average Productivity of Labour would be 5 goods (500/100)

Production and Productivity

CAD: Computer Aided Design Computer software which allows designs to be easily drawn up and edited

CAM: Computer Aided Manufacturing Computer-controlled industrial robots which help create the product e.g. 3D printers

CIM: Computer Integrated Manufacturing The combination of CAD and CIM into one process


The importance of costs are that they are an essential part of calculating profit. If most firms are profit maximizers then this is crucial. We calculate profit through the equation: Total Revenue - Total Costs

A firm has may different types of costs:

  • Fixed Costs - these are costs that do not change when output changes. e.g. rent. Also called overheads or indirect costs.
  • Variable Costs - these are costs that change when output changes. e.g. raw materials. Sometimes called 'direct' costs
  • Total Costs - these are fixed plus variable costs
  • Average Costs - this is the total costs divided by output
  • Marginal Costs - this is the cost of adding the next unit

Similarly, a firm has different understandings of revenue. We get

  • Total Revenue - this is the number of units sold, multiplied by the price (or the value of everything sold)
  • Average Revenue - this is the value of goods sold divided by output
IGCSE costs

IGCSE Business Studies Fixed Costs

Figure 2.1 - Total, Variable and Fixed Costs

Break Even Analysis

Break Even Analysis puts the some of our cost information onto a graph along with information about revenue to tell us:

  • Profit - where Total Revenue is greater than Total Costs
  • Loss - where Total Costs are greater than Total Revenue
  • Break Even Point - where Total Costs equal Total Revenue
  • Shut Down point - when our Variable Costs cannot be covered

Uses of Break Even Analysis

We use break -even analysis to find out:

  1. How much to produce - we can find the break even point to understand the minimum point of production. If we produce at a level below variable costs we cannot stay in business
  2. How much profit we are making - this is done by calculating TR - TC at any level of output
  3. What the margin of safety is - this is the difference between the current level of output and the quantity of output at break even point. This is shown in the first diagram on the right
  4. To understand the implications of rising/falling costs - these will shift the TC curve, affecting profit and creating a new break even point - as shown in the second diagram to the right.

Economies of Scale

Economies of scale are when average costs are lowered as a business increases its scale of production. There are different types.

  • Purchasing Economies - when large companies are charged lower average prices because they purchase such large quantities (bulk buying)
  • Financial Economies-when large companies are given lower interest rates or larger loans because of the valuable assets that they own.
  • Transport Economies - large companies can fill transport vehicles, so the average cost of transporting one good is lower than if it was half empty. There is no empty, wasted space.
  • Managerial Economies - this is when large companies attract the best managers, who know how to save money through their skills
  • Production Economies - large companies can use large machinary designed for large-scale production. These machines are not available for small scale production and lower average costs.

Diseconomies of scale are when average costs rise as a business increases its scale of production. We can identify:

  • Managerial Diseconomies of Scale; when too many managers are hired, and their responsibilities begin to overlap, causing confusion and unneccessary costs
  • Communication Diseconomies of scale; when companies grow so large that communication becomes expensive and takes a lot of time (e.g. a multinational), so average costs end up rising.

IGCSE Business Studies Costs

Figure 2.2 - Break Even Analysis

IGCSE business studies break even analysis

Figure 2.3 Break Even Analysis - Margin of Safety

igcse business studies break even analysis

Figure 2.4 Break Even Analysis - Increase in Costs

Types of Quality Improvements

Quality Control - when a product is reviewed by the firm after it has been produced. If there is a defect, the product cannot go on sale.

Quality Assurance - when quality is ensured as the product / service is being built. The aim is to produce a product assured of zero defects. This can be done through TQM

Total Quality Management - various techniques that are put in place to ensure quality throughout the production process by creating a zero-defect - or defect-free - product. TQM can take different forms such as;

  • Quality circles (groups of people with similar jobs who inspect each other’s products and suggest improvements)
  • Benchmarking (observing rivals and copying their quality techniques)
  • Kaizen
  • igcse business studies quality

    Figure 3.1 - Quality


    Factors to consider for locating industry

    • Transport links
    • Location of suppliers and retailers
    • Cost of labour
    • Access to raw materials
    • Energy Supplies

    Factors to consider for locating country

    • Wage rates
    • Political Stability
    • Tax Rates
    • Laws
    IGCSE Business Studies Location factors revision
    Figure 4.1 Location Factors