Chapter 25 - Capacity utilisation

Question 1

Capacity utilisation

Answer 1

Capacity utilization is the measure of how much of a company’s production capacity is currently being used.

OR

Proportion of maximum output capacity currently being achieved

Question 2

Capacity utilisation use

Answer 2

Used to determine operational efficiency
Max Capacity is the total level of output that can be achieved in certain period of time

Question 3

Capacity Utilization
Impact on average fixed cost

Answer 3

This explains why rate of capacity is used is of significance to operation efficiency

Remember what is efficiency!

Utilization at high rate = average fixed cost spread over large number of units (remember contribution).

If low unit amount = high unit fixed cost

Question 3

Benefits OF OPERATING AT 100% Capacity

Answer 3

• Employees feel secure, motivated and feel pride in their work
• Efficiency, max use of resources = no waste = productivity
• Cost effective, high output = low costs
• Competitive advantage, meeting demand without delays

Question 4

DRAWBACK OF OPERATING AT 100% Capacity

Answer 4

• Staff pressured
• Possibly turn away customers (they will be unable to handle demand increase/new customers since they are already using all their resources)
• No time to maintenance (Long term issues)

Question 5

What is Excess Capacity?

Answer 5

Exists when the current levels of demand are less than the full capacity - known as SPARE CAPACITY

Leads to HIGH unit fixed costs
what can you do to reduce excess capacity?

Question 5

Solutions to seasonal spare capacity

Answer 5

• Maintain High output level (Stock up)&raquo_space; high cost, can go bad, lose popularity/no longer trendy
• Adopt flexible production system (produce goods that sell better at different times during year)
• Offer flexible employment contracts

Question 6

Solutions to long term spare capacity due to trends/tech/competition/economic cycle

Answer 6

• Try and revive demand - promotions
• Cut production capacity
• Rationalization (reducing capacity - increase efficiency)

Question 7

Pro and Con of rationalization

Answer 7

Pro:
- Efficiency, reduces redundancies
- Cost reduction, by identifying and reducing inefficiencies
- Better resource allocation

Con:
- Job losses
- Employees may be resistant to changes
- reduced innovation, employees are resistant to give ideas as focus is on cutting costs

Question 8

Excess capacity evaluation

Answer 8

Long run:
*Rationalize existing operations:
Closing factories/other production units = lower expenses + higher capacity utilization from remaining production units = redundancy payments, low job security, Industrial action may be a risk., Capacity may be needed later if the economy picks up or if the business develops new products, The business may be criticised for
not fulfilling its social
responsibilities. (by reducing investment into community/by neglecting environment by pollution/by causing job losses )
*R&D new product development:
- New products will replace existing products and make the business more competitive.
- If introduced quickly enough, new
products might prevent
rationalisation and associated
problems.
- Costly, may take too long to prevent cutbacks in capacity and rationalisation, Without long-term planning, new products are introduced too quickly, without a clear market strategy, and may be unsuccessful.

Short run:
*Maintain output, increases inventories = expensive = risky if sales do not recover
*Introduce flexible production system, allowing products to be made that could be sold at different times of the year, this needs a flexible workforce = flexible work contracts so that, during periods of low demand and excess capacity, workers work fewer hours to reduce capacity and costs. This may have a negative impact on employee morale and motivation.

Question 9

Capacity shortage (demand > production) solutions

Answer 9

• Increase sale, by acquiring production resources
• Outsource or subcontract more work to other businesses
• keep working at full capacity and not expand, perhaps because of the danger that demand might fall back in the near future?

Question 10

Advantages and disadvantage of subcontracts/outsourcing (methods for reducing long-term capacity shortages)

Answer 10

Advantages:
* No major capital investment is
required.
* It should be quite quick to arrange.
* It offers much greater flexibility
than expansion of facilities – if
demand falls back, then contracts
with other firms can be ended.

Disadvantages:
* It gives less control over the quality of output.
* It may add to administration and
transport costs.
* There may be uncertainty over
delivery times and reliability of
delivery.
* Unit cost may be higher than in
house production due to the supplier’s profit margin.

Question 11

Advantages and disadvantage of Investment capital in the expansion of production facilities (methods for reducing long-term capacity shortages)

Answer 11

Advantages:
* It increases capacity for the long
term.
* The business is in control of quality and final delivery times.
* The new facilities should be able to use the latest equipment and
methods.
* Other economies of scale should be possible too.

Disadvantages:
* The capital cost may be high.
* There may be problems with raising capital.
* It increases total capacity, but
problems could occur if demand
should fall for a long period.
* It takes time to build and equip a
new facility and customers may not
wait.

Question 12

Outsourcing Advantages and Disadvantages

Answer 12

Advantages:
*Reduction and control of operating costs, Instead of employing expensive specialists who might not be required at all times, it could be cheaper to buy in specialist services as and when they are needed.
*Increased flexibility
*Improved company focus
*Access to quality service/resources
*Freeing up internal resource

Disadvantages:
*Job Losses
*Quality
*Customer Resistance
*Security
*CSR