Production, Marketing and Finance: making, selling and funding the output
This profile carries the heaviest factual load on the paper. Multiple-choice items test definitions, classifications and calculations; Paper 2 asks you to apply the marketing mix or select a source of finance for a stated need. Expect numbers - cost classification, break-even, margins - and expect to justify a decision rather than merely define a term.
Production
- Factors of production and rewards: land earns rent, labour earns wages or salaries, capital earns interest, enterprise earns profit.
- Stages: primary (extractive), secondary (manufacturing and construction), tertiary (services); each stage is linked to the others through backward and forward linkages.
- Methods: job production for one-off customised output, batch production for groups of identical items, flow production for continuous standardised output such as cement or sugar.
- Economies of scale include technical, managerial, financial, marketing and risk-bearing; expansion beyond capacity produces diseconomies.
Marketing
- The mix is product, price, place and promotion, and each element must be justified for the specific good.
- Primary research (surveys, observation, experiments) is current but costly; secondary research is cheaper but may be dated.
- Segmentation is dividing a market by income, age, geography or lifestyle - it is not the same as research.
- Channels: producer to consumer is the shortest; producer to wholesaler to retailer to consumer is the longest and suits mass-market goods.
Finance
- Short term: overdraft, trade credit, factoring. Medium term: hire purchase, leasing, bank term loan. Long term: share issue, debentures, mortgage, retained profits.
- Fixed capital buys assets; working capital covers stock, wages and debtors.
- A credit sale is profit but not cash, so a profitable firm can still fail.
Worked example
Fixed costs are $12,000, the unit selling price is $10 and unit variable cost is $6. Contribution per unit is $4, so break-even is 12,000 ÷ 4 = 3,000 units. Selling 3,500 units gives a margin of safety of 500 units and profit of 500 × $4 = $2,000. Raising the price to $11 lifts contribution to $5 and drops break-even to 2,400 units - show that reasoning, not just the final figure.
Traps that cost marks
- Naming the four Ps without explaining each for the given product.
- Mixing fixed with variable costs; a cost is fixed only within a relevant range and period.
- Treating debenture holders as owners - they are creditors paid interest before dividends.
- Assuming profit equals cash in the bank.