Modes of Operation

Modes of operation is how well a company is doing at making a profit. There are about four levels of profit making in a company that I want to look at.

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The first is economic profit. This is when the price is larger than the cost the company is incurring to make the product. Cost includes two things: variable cost and fixed cost. Fixed cost is always there.

Mini-test: Social Studies – Modes of Operation 

81.
1. The fixed cost includes business expenses that do not depend on the level of goods and services produced by a company.
2. The variable cost includes expenses that change in proportion to the amount of goods or services produced by a company.
A.  
B.  
C.  
D.  
82. Which of the following descriptions of profit categories is incorrect?
A.  
B.  
C.  
D.  
E.  
F.  

 

Next Lesson: Opportunity Cost

The transcript is for your convenience
It includes things like rent and salary for the company. Variable cost varies with how much the company is producing. Basically, it’s the cost for the company to produce a product. So, say a company is producing a widget, variable cost is how much it cost to produce each widget. But like we said, fixed cost is just like it sounds, it’s fixed. It does not change, so if a company is producing 100 widgets or 10 widgets or no widgets, the fixed cost is always there and remains the same.

A normal profit is when price equals cost. Now, this does not mean that employees are not getting paid, because remember, cost includes fixed cost, which includes employee salaries. So, the price is covering all of the variable cost and all of the fixed cost, there’s just no surplus.

A loss-minimizing condition is when the price the company is charging is covering all of the variable cost, but only some of the fixed cost. At this point, it’s best for the company to continue to produce, because if they stop producing, variable cost will be removed, but then the company will have to cover all of their fixed cost. Well, as currently through producing widgets, they’re able to cover all their variable costs and at least some of their fixed cost. So, they do need to reform their business practices, but it’s best financially to keep producing at this point.

A shutdown is when it’s in the best interest of a company to stop production, because at that point, the price is only covering some of the variable cost and none of the fixed cost. So, at this point, the company is having to pay for some of the variable cost and all of the fixed cost. So, it’s best to stop producing at that point because now, variable cost will be removed, and I’ll only have to focus on covering the fixed cost, and not even have to worry about covering some of the variable cost now.

So, those are the four different levels of profit making among a business.

Next Lesson: Opportunity Cost