IGCSE Business · Chapters 17

17 · Production

Production & productivity

Production → creating output

Combining inputs to create goods or services.

Productivity → efficiency

Output produced from a given input.
Labour productivity = output per period ÷ number of employees

Inventory & lean production

Inventory → three forms

Raw materials
Work in progress
Finished goods

JIT · Just-in-time

Materials arrive when needed for production.
Benefits → lower storage costs; less cash tied up; less waste.
Risk → late supplies may stop production.

Kaizen · continuous improvement

Small, frequent changes.
Employees identify waste, delays and quality problems.
Aim → less waste; higher efficiency.

Methods of production

Job → one-off / customised

Low volume; high variety.
Requires skilled labour.

Batch → groups of identical products

Some variety between batches.
Changeover time; inventory may rise.

Flow → continuous, standardised stages

High volume.
High capital cost.
A breakdown may stop the whole line.

Technology

Benefits

Higher output; fewer mistakes.
Consistent quality.
Lower labour cost per unit.

Risks & costs

High capital cost.
Training and redundancy.
Breakdown or obsolescence.

Sustainable production

Actions

Renewable energy.
Less waste; fewer resources.
Recycling; environmentally friendly packaging.

Trade-off

Better image / sales ↔ potentially higher costs.

18 · Costs, scale & break-even

Business costs

Fixed costs · FC

Do not change with output in the relevant period.
Rent; insurance; salaried managers.

Variable costs · VC

Change when output changes.
Materials; packaging; piece-rate labour.

Total & average costs

Total cost = fixed cost + total variable cost
Average total cost = total cost ÷ output

Economies of scale

Growth → average cost falls

Purchasing → bulk discounts reduce input costs.
Technical → specialised machinery raises productivity.
Managerial economies.
Financial economies.
Marketing economies.

Diseconomies of scale

Growth becomes hard to manage → average cost rises

Poor communication → mistakes.
Weak coordination → delays and waste.
Lower motivation → lower productivity.

Break-even

No profit, no loss

Total revenue = total cost
Profit = 0

Calculations

Contribution per unit = selling price − variable cost per unit
Break-even output = fixed costs ÷ contribution per unit

Reading the chart

Horizontal axis → output / sales.
Vertical axis → costs / revenue.
Fixed cost → horizontal line above zero.
Total cost → starts at fixed cost.
Revenue → starts at zero.
Revenue meets total cost → break-even point.
Revenue < total cost → loss.
Revenue > total cost → profit.

01 / COST & SCALE

Economies & diseconomies of scale

How to read this chart

Start with the axes.Horizontal: Output. Vertical: Average cost.
Read the downward section.As output rises, average cost falls → economies of scale.
Find Q*.The lowest point of this curve → the lowest average cost shown.
Read the upward section.As output rises further, average cost rises → diseconomies of scale.

As the business expands, average cost falls because it benefits from economies of scale.

02 / BREAK-EVEN

Where revenue meets total cost

How to read this chart

Check both axes.Horizontal: Output/Sales. Vertical: Cost/Revenue.
Identify the three lines.Fixed cost is horizontal. Total cost begins at fixed cost. Revenue begins at zero.
Find the intersection.Revenue = total cost → break-even. Profit = 0.
Compare revenue and total cost.Before break-even: revenue < total cost → loss. After break-even: revenue > total cost → profit.
Read the vertical gap.The distance between revenue and total cost at a given output shows the amount of profit or loss.

19 · Quality of goods & services

Meaning of quality

Meeting customers’ needs & expectations

A good-quality product should be free from defects.
Expectations differ across goods and services.
Market research identifies expectations.

Why quality matters

Sales & reputation

Loyalty + new customers → more repeat purchases and sales.
Stronger brand image → greater trust.
More retailers stock products → more sales opportunities.

Costs & margins

Fewer complaints / returns → lower refund and replacement costs.
Ability to charge higher prices → potentially higher profit margins.

Quality control · QC

Inspect finished output

Inspectors check products against quality standards.
May inspect a sample of output.

Advantages

Specialist inspectors → less need to train every production worker in inspection.
Production can continue while completed output is checked.

Disadvantages

Late detection → waste and rework.
Source of faults may be hard to locate.
Hiring inspectors increases costs.

Quality assurance · QA

Prevent problems throughout production

Quality standards for each stage.
Check materials before production.
Employees check quality at every stage.
Identify problems before they continue.

Advantages

Early detection → less waste and rework.
Improved quality.
Worker responsibility → potentially higher motivation.

Disadvantages

Training costs money and time.
Training may reduce output in the short term.
Employees may still miss faults.

20 · Location decisions

Why location matters

When decisions arise

Starting a business.
Opening additional shops / offices.
Entering a new market.
Relocation → moving existing operations.

Business effects

Costs; revenue; production.
Distribution speed and cost.
Future growth.
Employees, communities and reputation.

Choosing a site

Costs & resources

Site cost → rent / purchase of land and buildings.
Labour → suitable skills, availability and wages.
Transport → materials, finished goods, movement between sites.
Near suppliers → useful for heavy, bulky or frequent deliveries.
Near customers → faster delivery; lower distribution costs.

Market & premises

Market / sales potential → customers at that location.
Site size → space for current operations and future needs.
Manufacturing → machinery, production lines, materials, finished goods, employee facilities.
Services → customer areas, waiting space, equipment, storage and parking.

Government & infrastructure

Grants → less finance needed for setup.
Tax incentives → lower ongoing costs.
Legal restrictions → planning permission, permitted land use, noise, pollution, waste disposal.
Infrastructure → roads, rail, ports, airports, electricity, water and communications.

Ethical concerns

Existing employees → job losses / ability to relocate.
Effects of closure on the local community.
Wages and working conditions at the new site.
Poor treatment → damaged reputation and customer loyalty.

Locating in another country

Reasons / advantages

Growth → new customers when the home market offers limited expansion.
Lower production costs → wages, rent, land and buildings.
Closer to overseas customers.
Avoid some import tariffs / barriers by producing inside the market.
Benefit from government incentives.

Disadvantages / risks

Communication / language → incorrect orders, mistakes and delayed decisions.
Cultural differences → tastes, beliefs, buying habits and workplace expectations.
Ethical concerns → existing employees and new working conditions.
New suppliers → inconsistent input quality.
Quality problems → defects, rework, complaints, returns and weaker reputation.

Making the decision

Compare options against objectives

1 · Identify essential requirements.
2 · Compare costs.
3 · Assess sales potential.
4 · Assess operational suitability.
5 · Consider risks and future needs.
6 · Choose the location that best supports business objectives.