Capacity Planning

Question 1

What is capacity ?

Answer 1

It refers to the level of output that can be produced using the current system at a particular point in time. If the firm is not operating at full capacity or is unable to produced any more output it results in demand being more then what the business can supply to it customer, therefore resulting in the loss of consumers to competitors. On the another hand, if the business over uses resources it can lead to the wasting of resources as supply of the business would be greater than the demand of customers.

Question 2

What is design capacity ?

Answer 2

It refers to the capactiy achieveable by the firm if all machinery and process are working in perfect order. However, few firms are able to achieve this and very few firms are able to remain operating in design capacity due to depreciation of machinery and equipment can be significant.

Question 3

What is effective or efficiency capacity?

Answer 3

It refers to the estimation of capactiy that would lead to the efficient operations of the business. It is done by measuring the maximum demand the production system can manage before it become inefficient.

Question 4

What does capacity utilisation measures ?

Answer 4

It measures the firm’s total capacity being used

Question 5

What is the formula for capactiy utilisation ?

Answer 5

Total Output / Total potential Output x 100

Question 6

What is the importance of capacity utilisation ?

Answer 6

1. It results in lower per unit fixed cost
2. It helps the firm to carter for the volume needs of the market
   3.Idle machinery and equipment can be put to better use to generate revenue

Question 7

What are ways to improvement capacity ?

Answer 7

1. The business can increase sales through promotional activities e.g : advertising and sales promotions
2. Reduce the down time of machinery and equipment. Extensive down of machinery and equipment can lead to a loss productive time and the underulitisation of capacity
3. Emploing seasonal and part time workers : This is often helpful in times of high seasonal demand and it helps the firms produc e more ( e.g Christmas , crop season and sugar industry )
4. The firm can outsource aspects of the production process to boost production

Question 8

What is economies of scale ?

Answer 8

This is where the business expands or grows to a certain point in which there is a lowering of its average per unit cost of production resulting in a benefit known as economies of scale.

Question 9

What are three types of economies of scale ?

Answer 9

1. Purchasing Economies
2. Technical Economies
3. Finacial Economies

Question 10

What is purchasing economies ?

Answer 10

One of the benefits of being a larger firm is that you are able to buy larger quantities of raw materials. Because of buying in bulk the firms would get better prices for those raw materials . This takes the form of trade discounts and the firms bargining with the suppliers who are trying not to lose their business. This would also lead to a reduction in the adminstartion per unit cost due to an increase in the order size. Also due to the firm having to deliver material regularly , it results in a lower transportation cost.

Question 11

What is technical economies ?

Answer 11

When firms grows it allows them to benefit from larger and more efficient machinery. Large firms are able to use flow production where the production process i on an assembly line. This allows firms to use specialized machines , replacing the sometimes large labour cost and increasing productivity and output.

Question 12

What is financial economies ?

Answer 12

Larger firms has a better chance at sourcing finance. This is becasue they have more bargining power, more collerateral and are more likely to achieve financing by the issuing of share or borrowing from lending institutions

Question 13

What is diseconomies of scale ?

Answer 13

This is a situation in which the business grows so large that instead of experiences a reduction in the average per unit cost of production instead they experience a rise in the average per unit cost

Question 14

What are the types of diseconomies of scale ?

Answer 14

1. Poor Communication
2. Demotivation
3. Lack of control and coordination

Question 15

What is poor communication ?

Answer 15

Communication is key in an organisation, as managers maust ensure that their line of communication is working properly. However, when a business become larger it results in the communication of the organisation being long and inflexible. Management would be unable to communicate with emplyees and vice versa. The breakdown in communicate results in emloyees not receiving clear instructions leading to an increase wastage.

Question 16

What is demotivation ?

Answer 16

Over time employees become demotivation when they are not treated fairly and properly. In some situations, when businesses grow workers feel isloated and unappricated. When demotivation occurs it would lead to a fall in productivity, when that fall , output would fall and by extension a rise in the average per unit cost of production.

Question 17

What is meant by lack of control and coordinating ?

Answer 17

As the business grows their span of control wides and it becomes more difficult to manage. Managers would find it hard to ensure that all employees are working towards the goals to the organisation as well as the operating at full capacity. This would increase opearting cost resulting in diseconomies.