Reduction of Costs to Maximize Profit Returns

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Reduction of Costs to Maximize Profit returns (Production Firms) Introduction Cost leadership implies that an organization or business tries to have low costs so that they can sell their products and services at low costs. This type of leadership strategy allows them to make profits even with low costs than their competitors. It places the business at a position where it can effectively compete on the basis of price with both the new entrants in the industry and existing competitors. It also creates a potential for profits; charging prices that are almost average to the industry while earning profits above industry standards. The following process is used to achieve cost leadership: advertising and promoting the product to achieve sales in large volumes (Buchner, Ellerman & Carraro, 2007). Invest in the latest production technology to lower production costs. Achieve high levels of productivity to reduce labor costs, one can copy designs rather than producing originals and cheaper raw materials can be used. Reducing localization and distribution costs will reduce distribution costs. Exploitation of organizational experience and knowledge will also be helpful. Finally, secure government assistance will be important. Short run cost curve Price Marginal cost Marginal revenue Quantity Long run cost curve Price marginal cost Marginal revenue Quantity The short run cost curve is u-shaped due to the period taken to experience sharp changes in the cost. The price

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