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The theory of revealed preferences is based on the very simple idea that a consumer’s decision to buy a product is related only to the fact that they prefer it or because it is cheap compared to similar products. These conditions form the corresponding axioms of behavior (Bade & Parkin, 2020). Another set of goods is the optimal set, which is better than any other set available to the consumer (Bade & Parkin, 2020). The same reasoning can be applied to any set lying on or under the budget line that differs from the demand set. Since no such set was purchased under budget constraints, the purchased set is better for a particular consumer. The weakness of the theory of revealed preferences is the possibility of applying its analytical apparatus only in conditions of qualitative rather than quantitative analysis of economic phenomena. The revealed preferences allow us to establish general directions of the effect of substitution in price changes, but it is impossible to construct quantitative boundaries of the income and substitution effects and the demand function (Bade & Parkin, 2020). Researchers associate the problem with combining the advantages of standard approaches to the analysis of consumer choice and the theory of revealed preferences.
As applied to a university, the theory works as follows. The administration of an educational institution identifies the areas that are most in demand among potential students, and emphasizes them. In this way, the university takes into account the needs and desires of potential buyers, and students and their families buy services. The theory applies not only to the design of educational programs but also to other aspects of the institution, such as the provision of secondary services (Prince Mohammed Bin Salman College, 2021). For example, the administration analyzes preferences and makes meals for students, develops its library, and creates an inviting website and articles. All of these activities are aimed at increasing customer loyalty to the university, in part by advocating for the use of the institution’s services.
Profit/Loss Analysis
The purpose of the organization’s profit analysis is to find out the reasons, which caused the change in profit, to determine the reserves for its growth and to prepare managerial decisions on mobilization of the identified reserves. Undoubtedly, the methodology and sequence of profit analysis and evaluation are determined by the form it is supposed to take. However, it is possible to note a number of general methodical moments, which allow an economist to build a scheme of analysis of the financial results of economic activity of the enterprise (Bade & Parkin, 2020). First of all it is necessary to define a change in the amount of general accounting profit of the enterprise using data from the report on financial results for the reporting and previous years, and also indicators of the business plan for the reporting year.
The analysis of the financial results of the enterprise begins with the study of the volume, composition, structure and dynamics of profit (loss) before taxation. It is done in the context of the main sources of its formation, which are profit (loss) from sales and profit (loss) from other activities, the balance of other income and expenses (Bade & Parkin, 2020). According to the results of calculations the conclusion is made about the impact on the deviation of the amount of profit (loss) before taxation of changes in the values of the sources of its formation: profit (loss) from sales and profit (loss) from other activities.
The analysis of income and losses of the university showed that the activity of the organization is in surplus. The amount of funding and flows from the side of the purchasers significantly exceeds the costs and losses of the university. According to the website, the organization has more than 1,000 students at one time, where each person contributes a certain amount equal to the cost of tuition (Prince Mohammed Bin Salman College, 2021). In addition, the university has contracts with organizations for staff development and graduate jobs (Prince Mohammed Bin Salman College, 2021). In general, the financial flows fully cover the activities of the university and its expenses, as can be seen from the activities and existence of the organization.
Economic versus Accounting Cost
Production costs are divided into economic and accounting costs. Economic costs – total costs, including, in addition to the calculated, and opportunity costs. Alternative (imputed) costs – the foregone benefit of alternative use on the organization’s working capital tied up in working capital. For example, in agriculture, where the factors of production are limited, the expansion of one of its industries will cause a limitation of other industries that use the same factors, there is a lost benefit from the reduction of other industries or technologies (Bade & Parkin, 2020). At the same time, lost profits are also costs. However, their registration falls out of sight and is overlooked in traditional accounting (financial) and is not reflected in practice. This missed benefit acts as imputed costs and is an additional cost that can be calculated in the management accounting system in determining the economic efficiency of its own production.
Accounting costs – a monetary expression of expenses on use of production factors, as a result of which production and sale of production are carried out. A feature of accounting costs is that they do not include the opportunity cost of production factors. In accounting, the object of accounting is only actually committed and documented costs. Only in the system of management accounting for the determination of opportunity costs can be organized subsystem (Bade & Parkin, 2020). It includes a separate direction, where the information is formed to determine the choice of alternative use of resources, justification and adoption of optimal management decisions.
Concerning the university, it is necessary to allocate that accounting costs here are minuscule. The matter is that industrial activity – it is drawing up of programs of education, payment of salaries to professors. This accounts for a minimal share of expenditures, since this production is not costly, especially for programming education. At the same time, one of the largest expenditures of the university is economic costs. They include a huge number of expenses, from the provision of campuses and buildings, to the purchase of goods of any kind. As it has already been marked above, the financial costs are fully covered by the surplus from the university’s activities.
Efficiency Analysis
The analysis of enterprise efficiency begins with the calculation and comparative evaluation of profitability ratios, which characterize the efficiency of the enterprise, the main of which:
- Profitability of sales = Profit from sales / Total cost of sales.
- Profitability of sales = Profit from sales / Revenue.
- Profit margin = Net profit / Revenue (Bade & Parkin, 2020).
Profitability of production and margin of sales characterize the effectiveness of current activities, and the rate of return – the entire financial and economic activities of the company. It is possible to formulate the following recommendation based on the results of the profitability analysis – to provide an increase of efficiency of the current activity of the company at least up to the last year level at the expense of a decrease in the prime cost of sales, and administrative and commercial expenses. Despite the fact that the university’s business is in surplus, it is necessary to consider the proposed strategy. Six Sigma, without interfering with economics, can be implemented to manage a company so that costs and unnecessary expenses are reduced. This strategy will allow the university to focus more on the most profitable areas, while eliminating unnecessary or unprofitable ones.
References
Bade, R., and Parkin, M. (2020). Foundations of economics. Pearson.
Prince Mohammed Bin Salman College. (2021). Terms & conditions.
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