How To Solve The Formula For The Specified Variable Optimal Cost Structure and Effective Scale Economies

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Optimal Cost Structure and Effective Scale Economies

How do firms choose their value structure? What is the nature and function of performance scales? What are the sources of effective and ineffective scales? These policy questions are related to the ultimate goal of business enterprise—the optimal mix of expenditures that maximizes returns on investment and shareholder wealth while minimizing operating costs, at the same time.

Obviously, efficient economies of scale (MES – Low Scale of Efficiency) are associated with cost structures that are the most important and essential to sound business strategies designed to increase the productive capacity of business wealth. In this series on effective expense management, we’ll focus on the key questions of a proper plan and provide practical guidance. The primary purpose of this review is to highlight basic cost theory, strategic spending relationships, and industry best practices. For specific money management strategies please consult a professional.

As we have already begun, the actual cost structure and the appropriate scale of operation of each firm differ significantly based on the overall dynamic industry, market structure-level of competition, height of entry/exit barriers, market competition, stage of the business life cycle, and its competitive market environment. In fact, as in most market performance indicators, the value of a certain business is conceptually only with reference to the expected value in the business (average) and benchmarks that are generally accepted in the business and best practices.

One of the most important contributions of economic science to scientific management is the principle of the Bellmann Equation – a dynamic process method that breaks down the decision problem into small problems and the previous use of economics by Beckmann, Muth, Phelps and Merton, and the result of the Recursive model. In fact, any optimization problem has certain objectives that are often called objective functions such as maximizing production, maximizing profit, maximizing utility, minimizing total cost, minimizing cycle time, minimizing distribution cost, minimizing transportation cost, etc.

Types of Cost Structure:

Cost Structures include a mix of fixed costs, variable costs and mixed costs. Fixed costs include costs that remain the same regardless of the volume of goods or services produced at the current rate of production. Examples may include wages, rents, and equipment. A number of highly capitalized industries, such as airlines and manufacturing companies, are characterized by high fixed costs that can be effective barriers to entry for new entrants into the industry. Please note that effective exit barriers are also effective entry barriers. When firms cannot easily exit unprofitable markets because of high exit barriers, they should not enter such markets in the first place.

Variable costs vary according to the volume of goods or services produced. Service-intensive industries such as banking and insurance are characterized by high variable cost ratios. In practice, variable costs are often used in profit estimation and the calculation of break-even points for a business or project.

Mixed costs have fixed and variable components. For example, some management salaries do not vary with the number of units produced. However, if the production falls significantly or reaches zero, then it can lead to a reduction. This is proof that all costs are variable over time.

Finally, a firm with a large number of variable costs (compared to fixed costs) can show fixed costs per unit and therefore a more predictable cost per unit revenue than a company with fewer variable costs. However, a company with fewer variable costs (and therefore a greater number of fixed costs) can increase its potential profit (and loss) because the revenue increases (or decreases) applied to the level of fixed costs.

Most businesses define their cost structure in terms of the costs incurred in relation to an item of value or activity. And because some expenses can be difficult to define, we often implement an activity-based project to allocate costs closely to the cost structure of the costing activity or what it is about and use activity-based accounting. Note that the time required to complete any given task is an important factor in cost control. Therefore, reducing the surface area of ​​any job or project is important to reduce the time required to complete the job or project. The following are examples of the main cost items for various expenditure items:

Product cost structure: Under this structure are fixed costs which may include direct labor and sales of goods; and variable costs that may include direct materials, manufacturing supplies, commissions, and level wages. Service cost structure: Underneath this cost structure are fixed costs which may include administrative overhead; and variable costs that may include employee wages, bonuses, payroll taxes, travel and entertainment.

Product line pricing structure: Under this structure are fixed costs that may include administrative overhead, manufacturing overhead, direct labor; and variable costs which may include direct materials, commissions, production materials; and Customer Cost Structure: Under this structure: Underneath this cost structure are the fixed costs that include customer service management overhead, warranty claims; and Variable costs that may include the cost of products and services sold to the customer, product returns, credits taken, early payment discounts.

The optimal cost is the combination of fixed and variable costs that minimizes total operating costs while simultaneously maximizing net operating income. Cost Structure describes all the costs (fixed and variable) incurred to run the business model. Above all, Cost structure refers to the types and relative amounts of fixed and variable costs incurred by a business enterprise. In practice, the cost concept can be classified by region, product line, product item, customer group, department, or division, etc.

In a cost-based pricing strategy, cost structure is used as a technique to determine effective prices, as well as to identify areas where costs can be reduced or at least subject to better control. Therefore, cost structure logic is a useful management accounting tool that has many financial accounting applications.

All business models have value associated with value creation – which occurs by adding real or perceived value to the customer for a good or service; value proposition – creating and maintaining effective and satisfying customer relationships; and value capture—which occurs through changes in the distribution of value in goods or services and products. The goal of the activity is to minimize total operating expenses. Such excess can be easily calculated after separating the cost drivers, key functions, key inputs; core resources, and strategic partnerships.

It is our experience that operating costs can be reduced in every business model. In addition, low cost structures are more important in some business models than others. It is therefore useful to distinguish between two broad categories of business models: Cost-driven and value-driven (many business models fall between these two extremes).

The DuPont model shows that Return on Investment is calculated as the product of Profitability (Revenue/Sales) and Turnover (Sales/Total Assets). DuPont’s analysis shows that ROE is affected by three factors – Efficiency, measured by Profit Margin; Asset Performance, measured by Total Asset Movement; and Financial Leverage, measured by Equity Multiplier: ROE = Profit Margin (Profit/Sales) * Total Asset Return (Sales/Asset) * Equity Multiplier (Assets/Equity).

Types of Business Models:

A cost-driven business model– Many cost-driven business models aim to reduce overheads wherever possible. This approach aims to standardize and minimize costs by creating and maintaining the lowest possible Cost Structure, using low cost and flexible propositions, high automation, and strategic delivery.

A value-driven business model– Under this business model most companies are less concerned with the design costs of a particular business model, and instead their main focus is on creating value. Premium value propositions, customization and a high level of personalized service often characterize a value-driven business model.

Some Practice Guidelines:

In fact, firms that want to increase cost control must increase time control. One of the most important revelations of Activity Based Accounting is the impact of time and labor on the overall operating costs of firms: Cost structure is activity driven and activity is time driven. Therefore, time is of the essence in effective cost management. Simply put, firms should reduce the time required to perform a task to reduce the costs associated with that task, ceteris paribus.

In addition, firms that want to grow and expand economies of scale must add costs that arise from a certain scale of operations. Please note that performance scales can work with the log-run-cost reduction derivative of the experience curve; learning outcomes; the breadth of the economy; division of labour; skills; Horizontal and vertical differentiation or inefficiency and long-term rising costs from an efficient and sustainable management with a brutal and personality-driven vision; organizational inertia; passive and abusive supervision; increasing bureaucratic costs; lack of innovation; increasing internal and external transaction costs.

In short, firms increase their cost structure by controlling labor time and increasing operational scales. Therefore, firms that want to increase the profitability of the business must formulate and implement effective and efficient cost management strategies based on the appropriate combination of costs that maximize return on investment and shareholder wealth while reducing operating costs, at the same time. As we have seen, there is growing evidence that firms choosing scale and volume tend to outperform those choosing to create a premium, ceteris paribus.

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