5.6 (HL-Only) Flashcards
(23 cards)
Capacity Utilization Rate
Capacity utilisation measures a firm’s existing level of output as a percentage of their maximum possible output.
An ideal Capacity Utilization for a made/manufactured product is 85%, for Services, getting as close to 100% is the ideal.
Capacity utilisation is a measure of a firm’s efficiency as you can calculate the extent to which they are using their respective resources.
Capacity Utilization Rate Formula
Actual Output/Productive Capacity x 100
Advantages of Capacity Utilization
Average (unit) costs of production are likely to be at their lowest so the business is operating efficiently
Lower costs per unit (economies of scale) will
likely lead to higher profits
Disadvantages of Capacity Utilization
Employees can become overworked and stressed due to working at full capacity
* Machinery and equipment are likely to deteriorate at a faster pace, thus increasing maintenance and replacement costs
Defect Rate
measure the amount of output which is rejected or has failings/problems.
Defect Rate Formula
(Total Defective Items ÷ Total Output) x 100
Productive Rate formula
Productivity Rate = (Total Output ÷ Total Input) x 100
what is the productivity rate
is a measure of the efficiency of production. It measures the amount of output generated per unit of input
simpler understanding of productivity rate
a general understanding of how efficient resources are being used by a company. More output for less input shows a high level of efficiency.
Labour Efficiency Rate
Measures the output per worker over a given period of time.
Labour Efficiency Rate formula
Labour Productivity Rate = Total Output ÷ Total Number of Employees
Capital Efficiency
measures how efficiently a business uses its fixed assets to generate output for a business.
Capital Productivity Rate formula
Total Output ÷ Total Fixed Assets
Operating Leverage
refers to the proportion of fixed costs a business has, relative to its variable costs.
Operating Leverage Formula
Operating Leverage= quantity x
(price - variable cost per unit)/ quantity x (price - variable cost per unit - fixed costs)
High Operating Leverage
Both would require high fixed costs due to specialized equipment but make very few actual items. However, each sale price is high enough (Differentiation Strategy) to justify the risk.
Productivity rate in summary
The higher the productivity rate, the more efficient the firm is. This is important as there is a positive correlation between a firm’s efficiency level and its profitability and competitiveness.
What are the 4Es
Economies of Scale: Reduces costs
Earnings: Higher production = higher profits = higher wages for productive workers
Efficiency: Highly productive businesses improves your competitiveness against rival firms
Evolution: High productivity = growth and evolution
Cost to Buy (CTB)
the total amount of money required to purchase it, including the price, taxes, shipping, and other fees
Cost to Make (CTM)
the amount of money required to produce a product or service
CTB or CTM?
- Expected amount needed (Q or Quantity)
- The costs directly associated with making the product, Fixed and Variable Costs (TC or Total Costs)
- The unit cost of buying from an external supplier - including transport costs (Price).
Cost to Buy (CTB) Formula
Price x Quantity
Cost to Make (CTM) Formula
Costs + (Price x Quantity)
