Business objectives in the private sector and public sector — practice questions

Budget airline (private):

• Primary Objectives: Profit maximisation and growth. This is achieved by maximising revenue (e.g., high 'load factors', ancillary sales) and minimising costs (e.g., no-frills service).
• Performance Measure: Load Factor, which measures capacity utilisation.
• Calculation: If a flight has 200 seats and sells 184, the load factor is (184 ÷ 200) x 100 = 92%. A high load factor is crucial for profitability.

State railway (public):

• Primary Objectives: Service provision, accessibility, and affordability. It may be required to operate socially necessary but loss-making routes.
• Performance Measure: Subsidy required per passenger or punctuality targets.
• Calculation: If a rural line has annual operating costs of £8 million and generates passenger revenue of £3 million, it requires a government subsidy of £8m - £3m = £5 million to continue operating.

Comparison: The airline's success is measured by its ability to generate profit from its assets. The railway's success is measured by its ability to provide a public service, even if it requires financial support from the government.

Step 1: Calculate current total annual cost and profit.

• Current cup cost: 1,000,000 cups × $0.12/cup = $120,000
• Total current costs: $1,900,000 (non-cup) + $120,000 (cups) = $2,020,000$
• Current forecast profit: $2,500,000 (Revenue) - $2,020,000 (Total Costs) = **$480,000**$

Step 2: Calculate proposed total annual cost and profit with compostable cups.

• Proposed cup cost: 1,000,000 cups × $0.18/cup = $180,000
• Total proposed costs: $1,900,000 (non-cup) + $180,000 (cups) = $2,080,000$
• Proposed forecast profit: $2,500,000 (Revenue) - $2,080,000 (Total Costs) = **$420,000**$

Step 3: Analysis of the conflict.

• The switch to compostable cups would decrease annual profit by $60,000 (from $480,000 to $420,000).$
• This demonstrates a clear conflict between the objective of profit maximisation and the CSR objective of environmental responsibility.
• The business must weigh the $60,000 reduction in short-term profit against potential long-term benefits such as enhanced brand image, attracting environmentally conscious customers (potentially increasing sales), and improved staff morale. The decision depends on the company's strategic priorities.