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Production, Productivity and Costs in a Business

Production turns inputs into output through a process. Productivity = output ÷ input; efficiency means no waste of time, material or money. A business needs key activities, key resources and key partners to produce. Costs are fixed (do not change with output) or variable (grow with output). Total cost = fixed + variable, and cost per unit = total cost ÷ units.

🎬 Step-by-step story

  1. A small bakery. Flour, sugar and a worker go in. The oven works. Cakes come out. This is production.
  2. Same 4 workers, new oven: 60 cakes, not 40. Cakes per worker went from 10 to 15. That is productivity.
  3. To bake, the shop needs three things: key activities, key resources and key partners, like the flour supplier.
  4. Costs come in two colours. Blue is fixed: it stays the same. Orange is variable: it grows with every cake.
  5. Add fixed and variable to get total cost. Divide by the cakes to get the cost of one cake. More cakes, cheaper cake.
  6. Your turn. Move the slider and find the number of cakes where the loss becomes profit.

Tip: drag the 3D scene to turn it. Use two fingers to zoom.

🤔 Common doubts, cleared

Is productivity the same as efficiency?

No. Productivity is a number: output per unit of input. Efficiency is about using resources without waste. They often rise together, as with the new oven.

Why is rent a fixed cost even when I bake no cakes?

Rent is a promise you made for the month. It is paid at zero cakes and at 100 cakes alike, so the blue bar never changes.

Why does each cake cost less when I bake more?

Rent and the oven cost the same in total. Share ₹2,000 over 50 cakes and each carries ₹40. Share it over 100 cakes and each carries only ₹20.

Where do partners fit into production?

Partners give inputs or services you do not make yourself, like the flour supplier. They are on the input side of the chain.

When does the business start to make a profit?

When sales money is higher than total cost. With price ₹50 and VC ₹20, each cake adds ₹30 towards the ₹2,000 fixed cost, so from the 67th cake there is profit.

Is labour always a variable cost?

No. Pay per piece is variable. A fixed monthly salary is a fixed cost because it does not change with output in the short run.

What is production? The production process

Production means making goods or services that people want. Every business does it in the same three parts.

A hospital, a school and a bakery all follow this chain. The idea that output depends on inputs is called the production function: more or better inputs and a better process give more output.

Efficiency and productivity

Productivity tells how much output you get from each unit of input.

Productivity = Output ÷ Input

Example: 4 workers make 60 cakes. Labour productivity = 60 ÷ 4 = 15 cakes per worker.

Efficiency means getting the output using as little time, material and money as possible, with little waste. A business can raise productivity by training workers, using better machines, or planning the work better. A business is efficient when it makes the same cakes with less flour wasted and less electricity used.

Key activities, key resources and key partners

Before producing, a business asks three questions. They are also three blocks of the business model canvas.

Partners let a business focus on what it does best and buy the rest.

Classifying costs: fixed and variable

Costs are what a business pays to produce. Sort them by how they react to output.

Some costs are direct (easy to link to one product, like flour in a cake) and some are indirect (shared by all products, like rent). Fixed costs are even paid when output is zero.

Calculating costs: total cost, cost per unit and break-even

Total cost (TC) = Fixed cost (FC) + Variable cost (VC), and VC = variable cost per unit × units.

Cost per unit (average cost) = TC ÷ units.

Bakery: FC = ₹2,000 a day, VC = ₹20 per cake. For 100 cakes: VC = 2,000, TC = 4,000, cost per cake = ₹40.

Break-even is the output where sales money equals total cost. Break-even units = FC ÷ (price − variable cost per unit). With price ₹50: 2,000 ÷ 30 = 66.7, so from 67 cakes the bakery makes profit.

Try it: cost your own tea stall

Pick a tea stall, a lemonade stand or a home bakery. List 3 fixed costs and 3 variable costs with rupee amounts for one day. Work out total cost for 20, 50 and 100 cups. Then find the cost per cup at each number. In the 3D, slide the cakes and watch the cost bar, then check the same with your own numbers.

Key formulas and definitions

Worked examples

1. A workshop uses 5 workers to make 150 chairs a week. Find labour productivity.

Productivity = output ÷ input = 150 ÷ 5 = 30 chairs per worker.

2. After training, the same 5 workers make 180 chairs. By what percent did productivity rise?

New productivity = 180 ÷ 5 = 36. Rise = 36 − 30 = 6. Percent = 6 ÷ 30 × 100 = 20%.

3. Classify: shop rent, flour, packing boxes, owner's fixed monthly salary.

Fixed: rent and owner's salary. Variable: flour and packing boxes.

4. FC = ₹5,000 and VC = ₹30 per unit. Find TC for 200 units.

VC = 30 × 200 = 6,000. TC = 5,000 + 6,000 = ₹11,000.

5. Using the data above, find the cost per unit.

Cost per unit = 11,000 ÷ 200 = ₹55.

6. Same business makes 400 units. Find TC and cost per unit. Why is it lower?

VC = 30 × 400 = 12,000. TC = 17,000. Cost per unit = 17,000 ÷ 400 = ₹42.50. It is lower because the fixed 5,000 is shared by more units.

7. FC = ₹12,000, VC = ₹40 per unit, price = ₹100. Find the break-even units.

Gain per unit = 100 − 40 = 60. Break-even = 12,000 ÷ 60 = 200 units.

8. A bakery sells 90 cakes at ₹50 with FC ₹2,000 and VC ₹20 per cake. Profit or loss?

Sales = 4,500. TC = 2,000 + 1,800 = 3,800. Profit = 4,500 − 3,800 = ₹700.

Common mistakes

Practice quiz

1. Which of these is an input for a bakery?
2. Productivity is:
3. Which is a fixed cost?
4. Total cost equals:
5. A flour supplier is a:

Practice: answer these yourself

Type or choose your answer, then press Check. Use a hint if you are stuck; the full solution appears after you answer.

Frequently asked questions

What is the production function in a business?

It shows how inputs (labour, material, machines) are changed by a process into output. It tells how much output you can get from the inputs you use.

How do you classify and calculate costs?

Sort each cost as fixed or variable (and direct or indirect). Then total cost = fixed + variable, and cost per unit = total cost ÷ units.

What are key activities, resources and partners?

Key activities are what the business must do, key resources are what it must have, and key partners are outside businesses that supply or help. They are blocks of the business model canvas.

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