Bep Indu Owne

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Economics & Principles Economics & Principles of Management of Management Break even Break even Analysis Analysis

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Transcript of Bep Indu Owne

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Economics & Principles of Economics & Principles of ManagementManagement

Economics & Principles of Economics & Principles of ManagementManagement

Break evenBreak even AnalysisAnalysis

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Using the Breakeven Spreadsheet

“Cost” Tab Details Fixed Cost, Variable Cost, and Total Cost

© Dale R. Geiger 2011 2

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Graphic Depiction of Breakeven

$

Units Sold© Dale R. Geiger 2011

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Graphic Depiction of Breakeven

$

Units Sold© Dale R. Geiger 2011

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Graphic Depiction of Breakeven

Units Sold

$

© Dale R. Geiger 20115

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Graphic Depiction of Breakeven

Units Sold

$

© Dale R. Geiger 20116

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Graphic Depiction of Breakeven

$

Units Sold© Dale R. Geiger 2011

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Graphic Depiction of Breakeven

$

Units Sold© Dale R. Geiger 2011

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Graphic Depiction of Breakeven

$

Units Sold© Dale R. Geiger 2011

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Breakeven Chart

Units of output

Rupe

es

BEP

FC

SR

Loss

Profit

Margin of safety

TC

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Define Contribution Margin

Contribution Margin = Sales – Variable Cost• Unit Contribution Margin Represents the dollar amount that each unit

sold Contributes toward profitUnit Contribution Margin =

Selling Price $/Unit – Variable Cost $/Unit

• What is the Unit Contribution Margin for Sebastian’s Dinner Theater?• For every ticket sold, profit increases by:

$30 - $10 = $20

© Dale R. Geiger 2011 11

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Define Contribution Margin

Unit Contribution Margin Represents the Rupees amount that each unit sold Contributes toward profit

Unit Contribution Margin = Selling Price Rs/Unit – Variable Cost Rs/Unit

• What is the Unit Contribution Margin for Sebastian’s Dinner Theater?

• For every ticket sold, profit increases by:$30 - $10 = $20

© Dale R. Geiger 2011 12

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Using the Breakeven Spreadsheet

Blue Area indicates Contribution Margin atVarious Quantities

© Dale R. Geiger 201113

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Linear Break-Even Analysis

• Over small enough range of output levels TR and TC may be linear, assuming– Constant selling price (MR)– Constant marginal cost (MC)– Firm produces only one product– No time lags between investment and resulting

revenue stream

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Graphic Solution Method

• Draw a line through origin with a slope of P (product price) to represent TR function

• Draw a line that intersects vertical axis at level of fixed cost and has a slope of MC

• Intersection of TC and TR is break-even point

TR

TC

FC

Break-even point

MC

P

1 unit Q

1 unit Q Q

$’s

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Algebraic Solution

• Equate total revenue and total cost functions and solve for QTR = SP x QTC = FC + (VC x Q)TR = TCSP x QBV = FC + VC x QBV

(SP x QBV) – (VC x QBV) = FC

QBE (SP – VC) = FC

QBE = FC/(SP – VC), or in terms of total Rupees sales,

SP QBE = (FCxSP)/(SP-VC)

= ((FCxSP)/SP)/((SP-VC)/SP) = FC/((SP/SP) – (VC/P)) = FC/(1-VC/SP)

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Related Concepts

• Profit contribution = P – VC– The amount per unit of sale contributed to

fixed costs and profit

• Target volume = (FC + Profit)/(P – VC)– Output at which a targeted total profit

would be achieved

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Concept of Breakeven Analysis

Finding the point at which revenues and costs agree exactly

The volume of output at which neither a profit is made nor a loss is incurred

Carried out algebraically or graphically

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Importance and scope of Breakeven analysis

Volume of salesCompare costs and revenues for all possible

volumesTo find the price of an a article to give the

desired profitTo determine variable cost per unitTo compare a number of business enterprises by

arranging their earnings in order of magnitude

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Calculation of Breakeven Point

• BEP = F / ( 1 – V / P )

• F – Fixed cost• V – Variable cost• P – Selling price

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Breakeven Chart Shows a clear view of the position of a businessGraphic presentation of accounting data portrays profits and losses at various output levelsdepicts relationship between marginal costs and fixed

costsMarks no profit no loss situationPortrays margin of safetyMake specific plans to effect profits through the control

of expenses sum up the impact of alternative decisions on costs

and profitsDecision making tool in the hands of management

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Breakeven Chart

DefinitionA graphical representation of the relationship

between cost and revenue at a given time

A graphic device to determine the breakeven point and profit potential under varying conditions of output and costs

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Interpretations and analysis of a Breakeven Chart

Marking no profit no loss situation occurs for a given volume of production

The area between total cost line and revenue line on the left hand side of the BEP marks loss whereas the area between the same lines on the right side of the BEP represents profit

Profit appears only when more than a volume of output reached

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Interpretations and analysis of a Breakeven Chart

Profit margin as % = 1 - Variables cost / Sales

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Breakeven Chart Effect of increase in fixed costs

Units of output

Rupe

es

BEP

FC

SR

TCNBEP

NFC

NTC

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Interpretations and analysis of a Breakeven Chart

Effect of increase in fixed costs Owing to the purchase of a new machine ,

increases the total costs and thus shifts BEP towards the right hand side

Decrease in profit

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Breakeven Chart Effect of an increase in variable cost

Units of output

Rupe

es

BEP

FC

SR

TCNBEP

NTC

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Interpretations and analysis of a Breakeven Chart

Effect of an increase in variable cost Owing to an in labour cost, shifts the BEP

towards the right hand side

Decrease in profit for the same units of output

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Breakeven Chart Effect of an increase in sales price

Units of output

Rupe

es

BEP

FC

SR

NBEP

NSR

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Interpretations and analysis of a Breakeven Chart

Effect of an increase in sales price

If the price of an article rises , a new sales revenue drawn with a greater slope shifting the BEP towards the left hand side

Increase the company profits for the same volume of output

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Interpretations and analysis of a Breakeven Chart

Effect of a decease in fixed cost, variable cost and sales price changes the BEP by drawing separate break even charts

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Margin of safety

The distance between BVP and the output being producedIf this distance is large , profits will be thereIf this distance is relatively small, profits will be

reduced considerablyExpressed in monetary terms or as a percentage

--- the margin of safety in relation to total mass.

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Angle of incidence

The angle ( ) at which sales revenue line cuts the total costs line

A large angle indicates that profits made at a high rate

A large angle of incidence with a high margin safety make favourable business position

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Limitation of breakeven chartDifficult to determine breakeven point because

of the difficulty in in classifying costsA tool for short analysisThe total cost line need not be a straight lineThe straight line representing sales revenue may

also misrepresent the true factsA chart represents a static picture Presents additional difficulties ( ie product mix )

when a company produces a variety of products

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Economics & Principles of Economics & Principles of ManagementManagement

Economics & Principles of Economics & Principles of ManagementManagement

IndustrialIndustrial

OwnershipOwnership

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Types of OwnershipTypes of Ownership

Single ownership(Private Undertakings )Single ownership(Private Undertakings )PartnershipPartnershipJoint Stock Companies Joint Stock Companies Cooperative organizationsCooperative organizationsState & central Government owned State & central Government owned

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Single ownership ConceptsSingle ownership Concepts

A business owned by one manA business owned by one maneg eg Printing press , a small fabrication shop Printing press , a small fabrication shopContributes the original assets and reaps full Contributes the original assets and reaps full

profitprofit

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Single ownership AdvantagesSingle ownership AdvantagesOwner free to take all decisionsOwner free to take all decisionsSimplicity of organizationSimplicity of organizationSecrecy kept as regards to method of Secrecy kept as regards to method of

manufacture manufacture

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Single ownership DisadvantagesSingle ownership Disadvantages

Limited opportunities for employees as regards Limited opportunities for employees as regards monetary benefitsmonetary benefits

Firm may cease to exist with the death of the Firm may cease to exist with the death of the proprietorproprietor

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Single ownership ApplicationsSingle ownership Applications

Business not involving high risk of failureBusiness not involving high risk of failure

A small capital to start with and to runA small capital to start with and to run

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Partnership - Concept Partnership - Concept

A single owner becomes inadequate as the A single owner becomes inadequate as the business growsbusiness grows

More persons have either capital to invest or More persons have either capital to invest or special skill to make the business more special skill to make the business more profitable. Such combinations of traders profitable. Such combinations of traders called Partnershipcalled Partnership

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Kinds of PartnersKinds of Partners

Partnership defined as they have agreed to Partnership defined as they have agreed to share the profits share the profits

They put together their property, ability, skill , They put together their property, ability, skill , knowledge etcknowledge etc

Associations of 2 or more (up - to 20 )Associations of 2 or more (up - to 20 )Partnership –agreement in writing (how profit, Partnership –agreement in writing (how profit,

loss etc divided among partners)loss etc divided among partners)

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Kinds of PartnersKinds of Partners

Active partners take part in the businessSleeping partners do not take part in the

business

Both are responsible for debts

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General Duties of PartnersGeneral Duties of Partners

Faithful to one anotherFaithful to one anotherRender true accountsRender true accountsCooperateCooperateMutual understandingMutual understandingRespect the views of one -anotherRespect the views of one -another

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Types of Partnership-Types of Partnership-General PartnershipGeneral Partnership

Each partner may act as though he were an Each partner may act as though he were an

individual proprietorindividual proprietor

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Types of Partnership-Types of Partnership-General PartnershipGeneral Partnership

Advantages Advantages Large capital availableLarge capital availableBetter talents , judgment and skillsBetter talents , judgment and skillsEasy to formEasy to formHigh incentiveHigh incentiveDefinite legal statusDefinite legal statusFull control of the business & profitsFull control of the business & profitsTax advantageTax advantageBorrow money easily from the bankBorrow money easily from the bankLosses sharedLosses shared

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Types of Partnership-Types of Partnership-General PartnershipGeneral Partnership

Applications Applications Law firmsLaw firmsRetail trade organizationRetail trade organizationMedical clinicsMedical clinicsSmall engg firmsSmall engg firms

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Types of Partnership-Types of Partnership-General PartnershipGeneral Partnership

DisadvantagesDisadvantagesEach partner has unlimited liability for the Each partner has unlimited liability for the

debtsdebtsDanger of disagreement & distrustDanger of disagreement & distrustAuthority dividedAuthority dividedLacks permanence & stability in case partner Lacks permanence & stability in case partner

dies. Therefore investors &lenders dies. Therefore investors &lenders hesitate to provide moneyhesitate to provide money

All partners suffer if wrong steps taken by All partners suffer if wrong steps taken by one partner one partner

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Limited PartnershipLimited PartnershipOvercomes some disadvantages of general Overcomes some disadvantages of general

partnershippartnershipLiability limited to the capital they have Liability limited to the capital they have

invested in the businessinvested in the businessShare the profit & their liabilities limited to Share the profit & their liabilities limited to

the amount of their investmentthe amount of their investmentInvestors and lenders not to hesitate to Investors and lenders not to hesitate to

provide moneyprovide moneyEasy and less costly to formEasy and less costly to formThough he invests in the business has no Though he invests in the business has no

voice in the managementvoice in the management

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Concept of Joint stock company

Overcomes the disadvantages associated with partnership types of industries

1) raising capital2) Easy disruption3) lack of facility4) unlimited liability

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Concept of stock company

Association of individuals called shareholdersDeath , insolvency disablement of shareholders

does not affectConsists of more than 20 personsAfter issue of a certificate from Registrar of

Companies , the company starts functioning

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Concept of stock company

Board of Directors elected by the shareholders .They make

1) policies2) decisions3) runs the company

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Concept of stock company

Liability of the members limited to the capital only

Finance raised by issuing shares , debentures, bank loans from industrial and financial corporations

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Types of Stock Company

Private limited company

Public limited company

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Private Limited Company

Some active partners & others sleeping partnersRestricts the right to transfer shares &avoids

public to take up debenturesMembers in between 2 and 50 Need not file documents with Registrar of Joint

Stock Companies

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Private Limited Company

Need not obtain a certificate of commencement of business

Need not circulate Balance sheet, Profit & Loss Account, but to hold annual general meeting

Accounts auditedAnnual return to the Registrar of Joint Stock

Companies

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Public Limited Company

Issuing shares – face value of Rs10,20,50Numbers of shareholders should not be less

than 7 & no limit for maximumTo file with the Register of Joint Stock

CompaniesTo issue a prospectus to the publicTo allot shares within 180 days

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Public Limited Company

Start only after receipt of the certificate to commence business

To hold Statutory MeetingNo restriction on transfer of sharesDirectors subject to rotationAccount audited every year

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Public Limited Company

To send financial statements to all membersTo hold general meeting every yearManaging agent gets a fixed percentage of profit

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Advantages of Joint Stock Companies

Huge sum of money raisedAssociates limited liabilityShares transferableCompany’s life not affected by death of

shareholders

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Advantages of Joint Stock Companies

Services of specialists obtainedRisk of loss dividedFlexibility of management

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Disadvantages of Joint Stock Companies

Legal formalities requiredManaged by big shareholdersHigh paid officials manage the whole showPeople may commit frauds

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Disadvantages of Joint Stock Companies

Board of directors & managers may sell or buy shares for their personal profits

Difficult to maintain secrecyLack of team spritDivided responsibility

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Applications of stock companies

Steel mills

Fertilizer factories

Engineering concerns etc

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Concept of Cooperative Organization

Contains features of large partnership & corporationProvide goods & services Members buy shares & profits redistributed to

them Each member has only one vote

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Concept of Cooperative Organization

Shareholders , a board of Directors elected officers

Periodic meetings of shareholdersSpecial democratic ownership formed by some

motivated individuals

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Forms of Cooperative Enterprises

Consumer’s cooperative retail tradeProducer cooperatives dairy products, grain

etcCooperative farming farmsCooperative housing providing housesCooperative credit societyloans,

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Forms of Cooperative Enterprises

AdvantagesDaily necessities at low ratesdemocratic form of ownershipOverheads reducedSelf helpBlack marketing eliminatedNo one can make huge profitsCommon man benefitedMonetary help secured from governmentGoods sold at lower rates

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Forms of Cooperative Enterprises

DisadvantagesMembers may not be competentFinance limitedConflict may arise among the membersMembers in position may take personal

advantageMembers may not be able to devote necessary

attention

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Concepts of Public SectorConcepts of Public Sector1) owned by the state1) owned by the state

2) managed by the state 2) managed by the state

3) owned and managed by the state 3) owned and managed by the state

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Concepts of Public SectorConcepts of Public Sector

Public enterprises operated either by Public enterprises operated either by government or associations with private government or associations with private enterprisesenterprises

To produce and supply goods and services To produce and supply goods and services required by the society and runs it with required by the society and runs it with service mottoservice motto

No dearth of capital & expansion not difficultNo dearth of capital & expansion not difficult

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Concepts of Public SectorConcepts of Public Sector

Accountable in terms of results to Parliament Accountable in terms of results to Parliament and State Legislatureand State Legislature

Seldom as efficient as a private enterprise Seldom as efficient as a private enterprise

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Evolution of Public SectorEvolution of Public Sector

Consumers and workers were exploited & the Consumers and workers were exploited & the intervention by the State led to evolutionintervention by the State led to evolution

Prior to 1947, Railways and posts and telegraphs Prior to 1947, Railways and posts and telegraphs etc managed by the Central Governmentetc managed by the Central Government

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Evolution of Public SectorEvolution of Public Sector

• Since independence, the following Since independence, the following established by Central &State governmentsestablished by Central &State governments

• The Hindustan ShipyardThe Hindustan Shipyard• Bharat Heavy Electricals LimitedBharat Heavy Electricals Limited• Indian Telephone Industries Indian Telephone Industries • Indian AirlinesIndian Airlines• Life Insurance Corporation of India Life Insurance Corporation of India • etc etc

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Objectives of Public SectorObjectives of Public Sector

To provide infrastructure for the growth of To provide infrastructure for the growth of economyeconomy

To promote economic developmentTo promote economic developmentBalanced development throughout the countryBalanced development throughout the countryTo avoid economic power in a few handsTo avoid economic power in a few hands

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Objectives of Public SectorObjectives of Public Sector

To create employment opportunities To create employment opportunities To earn foreign exchangeTo earn foreign exchangeTo look after welfare of the peopleTo look after welfare of the peopleTo minimize exploitation of workers and To minimize exploitation of workers and

customers customers

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Merits of Public SectorMerits of Public Sector

Helps in growth of private sectorHelps in growth of private sectorHelps in the implementation of the economic Helps in the implementation of the economic

plansplansConsumers benefited by cheaper and better Consumers benefited by cheaper and better

productsproductsPrevents the concentration of wealth in the Prevents the concentration of wealth in the

hands of fewhands of few

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Merits of Public SectorMerits of Public Sector

Encourages industrial growth of under Encourages industrial growth of under developed regionsdeveloped regions

Profits earned used for the welfareProfits earned used for the welfareOffers equitable employment opportunities to Offers equitable employment opportunities to

allallRaw material, power, & transport easily made Raw material, power, & transport easily made

available available

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Demerits of Public SectorDemerits of Public Sector

Wastages & inefficiency seldom be reduced Wastages & inefficiency seldom be reduced to a minimumto a minimum

Mostly runs at a lossMostly runs at a lossInterference by Government & PoliticiansInterference by Government & PoliticiansDelay in decisions Delay in decisions Incompetence persons may occupy at high Incompetence persons may occupy at high

levelslevelsWorkers shirk workWorkers shirk work

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Concept of Private SectorConcept of Private Sector

Non –government sectorNon –government sectorProfit rather serviceProfit rather serviceMainly consumer’s good industriesMainly consumer’s good industriesDoes not undertake risky venturesDoes not undertake risky venturesRun by businessmenRun by businessmen

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Merits of Private SectorMerits of Private Sector

Profits incurred highEfficiency – highWastage and labor minimumDecision – making promptNo interference by Government or politicians Competent persons occupy high levels

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Demerits of Private SectorDemerits of Private Sector

Exploitation motiveDearth of capital for expansionConcentration of wealth in the hands of fewLead to unbalanced growth of industries

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