3.4.2 and 3.4.3

Question 1

What is labour productivity?

Answer 1

This measures the output per employee and is a measure of how productive the workforce is. Productivity is a measure of output in relation to the input - in this case, the workers.

Question 2

What are unit costs?

Answer 2

The unit cost is sometimes referred to as the average cost because it takes into account the total costs of a business (fixed + variable) and divides this by the level of output.

Question 3

What is capacity?

Answer 3

The capacity of production is the maximum amount a business can produce over a period of time given the resources it has available.

Question 4

What is capacity utilisation?

Answer 4

measures existing output as a percentage of the maximum possible output.

Question 5

Ways to increase efficiency and labour productivity

Answer 5

• use data to set targets and motivate the workforce
• use as a tool for
  performance-related pay
• use as a tool to identity
  employees for praise and reward
• use to measure the efficiency of the workforce
• use to test different production techniques, such as teamworking or cell production
• use to identify training needs of the workforce

Question 6

Using unit cost data:

Answer 6

• use to set prices based on profit margin target
• use as a target to drive operational decisions such as how, where and what to produce
• use alongside variable costs to analyse distribution of overheads
• use to make decisions about which products to produce
• use to make decisions about scale of production - what level of output will achieve sufficiently low costs

Question 7

Using capacity utilisation data - benefits:

Answer 7

• setting targets for output
• identifying when a business should increase capacity (growth)
• identifying when a business should decrease
  capacity (retrenchment)
• identifying the maximum level of output before production becomes ineffective (diseconomies start to occur).

Question 8

Capacity utilisation data becomes most effective when used alongside

Answer 8

the other measures of performance, such as labour productivity and unit costs

Question 9

As capacity utilisation increases unit costs will

Answer 9

fall as the business experiences economies of scale. Unit costs may rise as a business approaches maximum capacity due to stress, mistakes and diseconomies

Question 10

Improving efficiency means

Answer 10

• getting more output from a given level of input
• using the minimum level of resources to achieve the desired product at the right quality.
• As efficiency is directly linked to unit cost it is a key route to maximising profits.

Question 11

Benefits of improved efficiency:

Answer 11

• labour productivity increased
• unit costs fall
• resources such as labour, expertise and time can be reallocated
• profit margins increase
• improved flexibility across the business
• opportunity to explore new ventures - such as a new product lines
• ability to charge lower prices and therefore improve competitiveness

Question 12

Productivity and efficiency are directly connected.
Greater productivity means
the workforce is more

Answer 12

efficient and efficiency across the business allows more resources to be devoted to production.
increase in labour productivity = decrease in labour costs per unit

Question 13

Ways to increase efficiency and labour productivity

Answer 13

• new ways of working - design the job of the workforce to be more effective
• training - invest in training to improve workers’ skills and motivation
• new technology - speed up processes and reduce human error
• better management - improve supervision, direction and leadership of the workforce
• introduce new reward systems - in order to create an incentive to work harder (incentives linked to output)

Question 14

Difficulties in increasing efficiency and labour productivity

Answer 14

Increasing the output of a worker may increase productivity and unit costs in the short term. But high levels of output can cause stress and burnout.
It is also true that a focus on output can compromise quality, customer service and creativity. Costly mistakes and faults are also more likely to occur leading to product returns and complaints.

Question 15

low capacity utilisation is

Answer 15

inefficient and can increase unit costs.

Question 16

Similarly, reaching maximum capacity can also cause problems. A business can use a range of techniques to control its capacity in the short term:

Answer 16

Increase capacity:
- sub-contract out production to another business
- offer overtime pay to the workforce
- employ workers on temporary

Decrease capacity:
(or utilise idle resources)
- rationalisation (redundancies or sale of assets)
- sub-contract in work from another business.
contracts.

Question 17

A business’s production process can either be

Answer 17

labour intensive or capital intensive. The balance of the two might depend on the nature of the product and the target market.

Question 18

Capital intensive:

Answer 18

mass production, standardisation, efficient production
- high level of capital investment (use of machinery)

Question 19

Labour intensive:

Answer 19

highly specialist, personal, service industry, high level of skill required
- high level of human input in the production process

Question 20

Real world examples: Robots

Answer 20

Robots in the production process speed up production and reduce human error.

Question 21

Real world examples: Communication

Answer 21

Communication systems such as group messaging apps and mobile phones allow workers to communicate individually and as a group more effectively.

Question 22

Real world examples: online ordering systems

Answer 22

link in with stock management systems to improve efficiency in logistics. These processes also allow for greater customisation for the customer.