Delayering and the Profits of a Business | AQA Q20, Paper 1 2018

Here is an example response to a 9-mark question on delayering and profit.

- - - - - - - -

Possible response

Delayering is likely to increase the profit of a business when, by removing one or more layers of the organisational hierarchy and reducing the number of managers, fixed costs are significantly reduced. Employee costs are often high where businesses have tall hierarchies and several layers of junior or middle management. There may also be too many managers in each layer, with each having low spans of control. These managers are often highly-paid and their costs are largely fixed. So, if a whole layer of the hierarchy is removed, then the reduction in the ongoing fixed costs of a business is likely to be significant. Because profit is total revenue minus total costs, a significant reduction in labour costs via delayering, is likely to positively affect the level of profit, as long as this is achieved without a reduction in revenue. However, there will be a one-off cost of making managers redundant which will adversely affect profit in the year the delayering is implemented.