Business Operations: Costs, Ventures, and Integration

Fixed Costs

Fixed costs are the costs of production that a business has to pay regardless of how much it produces or sells. Fixed costs exist even if there is no output. These costs remain unchanged in the short run. They can change, but these changes happen independently from the level of output.

Scale of Operations

Scale of operations is the maximum output that can be achieved using the available resources. It can be increased in the long term.

Variable Costs

Variable costs are the costs of production that change in direct proportion to the level of output or sales. These include commission earned by staff, raw materials, packaging costs, etc. In theory, if there is no production, then variable costs equal zero.

Contribution

Contribution refers to the amount of money that remains after all direct and variable costs have been taken away from the sales revenues of a business.

Margin of Safety

The margin of safety measures the difference between a firm's current sales quantity and the quantity needed to break even. It shows how much demand for a product exceeds the break-even quantity. The larger the positive difference between a firm's sales output and its break-even quantity (BEQ), the safer the firm will be in terms of earning a profit. A positive margin of safety means that the firm makes a profit. A negative margin of safety means that the firm makes a loss.

Joint Ventures

Joint ventures occur when two or more businesses decide to spread the costs, risks, control, and rewards of a business project. In doing so, the parties involved decide to set up a new legal identity. Businesses may opt for joint ventures since they allow organizations to enjoy some benefits of mergers and acquisitions but without having to lose their corporate identity.

Strategic Alliance

A strategic alliance is similar to a joint venture in that two or more businesses seek to form a mutually beneficial affiliation by cooperating in a business venture. However, unlike joint ventures, when forming a strategic alliance, the affiliated businesses remain independent organizations.

Multinational Corporation

A multinational corporation is a business organization that operates in two or more countries. It is legally registered in more than one country.

Types of Integration

• Horizontal: Two businesses on the same level of production integrate.
• Backward integration: A business integrates with another which is one sector behind in the chain of production.
• Forward integration: A business integrates with another which is one sector further in the chain of production.
• Conglomeration: Businesses in unrelated lines integrate.