1.3.2 Measuring Business Size
| In this lesson you will learn: |
|---|
✅ Methods of measuring business size, e.g. number of people employed, value of output, capital employed (profit is not a method of measuring business size) ✅ Limitations of methods of measuring business size |
1.3.2 Methods and Problems of Measuring Business Size
Methods of measuring business size
Business size is not a hugely popular topic in IGCSE exam questions, it’s more likely to come up in short answer questions like this one:
| Past Paper Question Example Paper 1 (a) Identify two methods of measuring business size Method 1 ……………………………………………………………………………………………………………………… Method 2………………………………………………………………………………………………………………………[2] |
However, it’s still important to learn the four main methods of measuring business size and be aware of the limitations of the different methods of measuring business size.
Let’s use the example of X-Ray Microchips and Yummy Oranges.
| Company | Number of employees | Capital Employed | Value of Output |
| X-Ray Microchips | 4 Designers 6 Maintenance Staff 10 Total employees | High tech production line $100,000 | 500 microchips at $100 = $500,000 |
| Yummy Oranges | 480 Farm workers 20 Managers 500 Total Employees | Basic fruit picking tools $20,000 | 500,000 oranges at $1 = $500,000 |
The first method of measuring business size is the number of employees. Simply add up all of the employees in X-Ray Microchips and Yummy Oranges and see which one has more.
The difficulty is that some large businesses may have invested in machinery, and have a high output but a low number of employees. If we only look at the number of employees as a means of measuring business size, it may give a misleading impression of business size.
Capital employed is calculated by adding up the value of all the assets in a business like buildings and machinery. X-Ray Microchips has much more capital employed than Yummy Oranges, because it is a high technology business and has to invest high levels of capital in its production line.
Value of output is calculated by multiplying market value of the product by the level of output.
| Value of output = market value of the product x the level of output |
At Yummy Oranges the value of output is 500,000 oranges x $1 =$500,000
However, we can’t be sure that all the oranges will be sold or the prices might change, which limits the accuracy of this figure.
| ⭐⭐⭐Top Tip ⭐⭐⭐ Usually when comparing business size it’s best to compare like with like. So compare orange producers with other fruit producers or microchip manufacturers with other technology suppliers. |
| ⚠⚠ DANGER! ⚠⚠ Profit is NOT a measure of business size. If a huge multinational like Netflix makes a loss, it doesn’t mean that a sole trader hairdresser is a larger organisation, as they earned a $100 profit. |
