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