Analysing operational performance

Question 1

Labour productivity

Answer 1

• Calculates how productive a business is by employing workers
• total output/number of employees

Question 2

Importance of labour productivity

Answer 2

• A more productive business will produce lower unit costs than competitors and be more efficient
• This means that the business can either make a higher profit per unit sold (if they sell product at same price as competitor)
• The business can offer customers a lower price than competitors

Question 3

Capacity

Answer 3

• Capacity describes the maximum output that a business can produce in a given period with the available resources

Question 4

Capacity utilisation

Answer 4

• The percentage of total capacity that is actually being achieved in a given period.
• Actual level of output/maximum possible output x 100

Question 5

Importance of capacity utilisation

Answer 5

• Used as a measure of productive efficiency
• Average production costs tend to fall as output rises - so higher utilisation can reduce unit costs, making a business more competitive
• So firms usually aim to produce as close to full capacity (100%) as possible
• If capacity utilisation is low then a business can rationalise - cut back on production capacity

Question 6

100% capacity utilisation impact on demand factors

Answer 6

• General reduction in overall market share
• Loss of market share
• Seasonal variation in demand

Question 7

100% capacity utilisation impact on investment factors

Answer 7

• Possibly new technology introduced
• Provides some ‘slack’

Question 8

100% capacity utilisation impact on inefficiency

Answer 8

• Poor maintenance, quality, employee disruption

Question 9

How can a business cope with excess demand?

Answer 9

• Extra shifts
• Temporary workers
• Reduce maintenance time
• Increase the lead time
• Sub-contract parts
• Overtime

Question 10

Unit costs

Answer 10

• How efficient a business is when using its assets to produce an output
• total cost/total number of units produced
• It is a measure of productive efficiency

Question 11

The importance of minimising unit costs

Answer 11

• Lower unit cost means a business will either have:
  a high profit margin or it can lower the price more than than competitors.
• The high profit margin can then be invested into producing more innovative products to give them a USP and a greater value to customers.

Question 12

Economies of scale

Answer 12

An economy of scale occurs as the cost per unit decreases when the scale of the business increases.

Question 13

Examples of economies of scale

Answer 13

• Purchasing EoS- where a business can negotiate better prices with suppliers
• Managerial EoS - when a firm employees specialist managers who are able to make the operation more efficient
• Technical EoS - large scale production enables a business to make use of technology
• Financial EoS - when a business can lower the costs of finance by accessing cheaper lines of credit such as bank loans and share issues

Question 14

Diseconomies of scale

Answer 14

A diseconomy of scale occurs when the cost per unit increases as the scale of the business increases.

Question 15

Examples of diseconomies of scale

Answer 15

• Purchasing DoS - supplier raises prices and business has no alternative suppliers, quality of raw materials
• Managerial DoS - recruitment, lack of skilled workers in certain areas, employees may be doing jobs they are not suited from
• Technical DoS - not all technology operates successfully, money could be wasted on this
• Financial DoS - interest rates going up will affect a business, also businesses may try to expand too much and go bankrupt