Capacity Utilization

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In the light of the concepts of the Cost Volume Profit (CVP) Analsis, respond to this comment: “We are unable to meet demand for our product, yet you refuse to let us operate all our processes at least practical capacity. I think that is a waste of equipment and personnel. What am I supposed to do, have them sweep the floors and let this expensive equipment sit idle?”

Word limit: 250-300 words

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  • SAtish Panicker

    >As the variable costs changes in direct proportion to the cost driver WHILE the fixed costs does not change immediately with the cost driver. The objective is to find out the OPTIMUM CAPACITY UTILISATION wherein contribution can be maximised. Producing less than optimum can result to unused capacity alternatively producing more will lead to waste of resources as contribution is not improved

  • shailaja kamath :EWD 10045

    >Capacity Management for any kind of manufacturing unit is very critical for, Organization’s objective i.e. to create value for customer and to maximize the profit.

    Normally, underutilized resources will lead to higher manufacturing cost per unit which results into compelling management to raise selling price to recover cost as well as to earn profits. Which can be suicidal in highly competitive market, there is a risk of loosing customer base or dip in demand for company’s product due to high selling price then market standard. So managers should do market analysis, competitors analysis and know customer’s willingness to pay before taking any pricing decisions.

    Company’s can maximize their profits either by reducing cost per unit or by increasing
    the selling price per unit; however before taking any decisions regarding capacity utilization it is very essential to know Break even units, volume optimization with respect to Profit maximization
    And Cost recovery.

  • shailaja kamath :EWD 10045

    >Capacity Management for any kind of manufacturing unit is very critical for, Organization’s objective i.e. to create value for customer and to maximize the profit.

    Normally, underutilized resources will lead to higher manufacturing cost per unit which results into compelling management to raise selling price to recover cost as well as to earn profits. Which can be suicidal in highly competitive market, there is a risk of loosing customer base or dip in demand for company’s product due to high selling price then market standard. So managers should do market analysis, competitors analysis and to know customer’s willingness to pay before taking any pricing decisions.

    Company’s can maximize their profits either by reducing cost per unit or by increasing
    the selling price per unit; however before taking any decisions regarding capacity utilization it is very essential to know Break even units, volume optimization with respect to Profit maximization
    And Cost recovery.

  • Sunil Gagwani

    >Firstly, to comment on the volatility of this article, the company must under no circumstance leave any of the resourses under utilised. Especially in this case, the demand is extremely high and the resources are availabe, but are under utilised. This is killing the image of the company as well, because it will negatively affect all the factors in the internal enviornment of the company. The management should find the cause and effect of the under utilisation of the valuable resources available which are always having a high value, because this would be a complete waste of equipment and personnel.

    Taking cost into consideration, the fixed and the variable cost will have a negative impact. The fixed cost per unit will remain constant, but at the cost of the efficiency of the personnel. In the long run this would be treated as inefficiency of the managers for not being able to control the situations.

    The Break Even Analysis also is the most important factor which will be affected negatively. Due to the increasing demand of our product and the fact that we are not able to use our resources to the maximum capacity, we will lose out on many areas internally as well as externally. Its extremely demotivating for the staff and we also will lose market share. Contributing to these issues will be the dangerous impact on out company Profit and Loss sheet. Under utilisation of resources will lead a delay in the company to recover their investments and reach their break-even point,as well as reduce the profit ratios. The break even point in the organisations history will be much later than they can possibly get it. They need to be very clear with the steps they take. However, in no circumstance is it advisable to do a under utilisation of resources. It will be a considered brutal to have experienced(personnel) and highly valuable resources just kept at bay.

    Sunil Gagwani
    SPJCM

  • Anonymous

    >Causes:

    1. It seems the Management thinks that the demand should always there for their product.. It will give added value to their product.
    2. Since nothing mention about the Profit and Cost for these activities, there may be the chances of more Operating Cost. It in turn may reduce the profit
    3. Management might have done Activity Based Costing and find out some of the processes are taking more costs…
    4. There may be some legal implications from the Government or Authorities about the ceiling of production.
    5. Due to the cost impact, the Management does not produce in high volume but in order to satisfy Certain high profile customers, the Company may be still allow for little production. Due to the satisfaction of certain customers the company may reap their profit in other products.

    Solutions:

    1. If only the cost is issue, then the Manger has to re-engineering the whole process and find out the cost saving factors.
    2. Un- utilized man power can be used effectively to make other products in order to maximize the products. In this way the cost can be shared.
    3. The machines can be used as above.
    4. Even the sweeping of the floor is also must in order to utilize the workers time effectively and Health and Safety reasons…
    5. If there is no other way to utilize the machines, let the machines can be put idle on the non –working hours, it will save the Operating Costs such as Power, Maintenance, Consumables etc.,

  • M.Subramanian

    >Causes:

    1. It seems the Management thinks that the demand should always there for their product.. It will give added value to their product.
    2. Since nothing mention about the Profit and Cost for these activities, there may be the chances of more Operating Cost. It in turn may reduce the profit
    3. Management might have done Activity Based Costing and find out some of the processes are taking more costs…
    4. There may be some legal implications from the Government or Authorities about the ceiling of production.
    5. Due to the cost impact, the Management does not produce in high volume but in order to satisfy Certain high profile customers, the Company may be still allow for little production. Due to the satisfaction of certain customers the company may reap their profit in other products.

    Solutions:

    1. If only the cost is issue, then the Manger has to re-engineering the whole process and find out the cost saving factors.
    2. Un- utilized man power can be used effectively to make other products in order to maximize the products. In this way the cost can be shared.
    3. The machines can be used as above.
    4. Even the sweeping of the floor is also must in order to utilize the workers time effectively and Health and Safety reasons…
    5. If there is no other way to utilize the machines, let the machines can be put idle on the non –working hours, it will save the Operating Costs such as Power, Maintenance, Consumables etc.,

    M.Subramanian
    EMBA-10

  • Nikeel Idnani – nikeel.idnani@spjain.org (SPJD E10021)

    >CVP Analysis deals with how profits and costs change with a change in volume. It looks at the effects on profits of changes in such factors as variable, fixed & semi fixed costs, selling prices, volume, and mix of products sold. By studying the relationships of costs, sales, and net income, management is better able to cope with many planning decisions. CVP analysis answers questions such as (1) What sales volume is required to break even? (2) What sales volume is necessary in order to earn a desired (target) profit? (3) What profit can be expected on a given sales volume? (4) How would changes in selling price, variable costs, fixed costs, and output affect profits? (5) How would a change in the mix of products sold affect the break-even and target volume and profit potential?
    It is important to know that a FIXED cost does not remain ‘fixed’ indefinitely. The cost behavior pattern is valid only within a given ‘relevant range’ beyond which variable & fixed costs become non-linear.
    Referring to the comment & CVP analysis, it might be a case wherein the cost of manufacture beyond the current production capacity does not warrant an increase in capacity, even though the plant is not running at full capacity utilization & the demand for the product outweighs the current supply.

    Nikeel Idnani – nikeel.idnani@spjain.org (SPJD E10021)

  • Sajeed Ahmed

    >The aggressiveness of the plant manager in this context is valid. Any company under any circumstances should not allow any of the resources to be idle as it increases the uncashed FC. Here the demand was so high that to meet the expected supply the company it has to use all its resources optimally.

    Now the total VC includes all the activity costs. Now the resources, which are a part of the different activity centers, are idle then it is just increasing the VC per unit production. Which in turn gives a false BEP estimation. For example there are four workers in a cycle manufacturing company. Out of these four workers only three are working. So the production is going to be less than what four workers will produce. But the salary paid to the fourth worker is going to be counted on the production of those number of cycles. Meaning giving a higher BEP.

    So the under utilisation of experienced workers and good equipments adds up extra FC to the product. It affects the internal and external environment as well. As the BEP point is higher so it will take lot more time to recover the investment. Which in turn will make the company a loss making one. If the company has enough resources and equipments to meet the demand then it should use optimally. And if they don’t want to continue the production then they should lay off the extra resources. Atleast it will not add up to the FC of the cost object.

    Sajeed Ahmed
    Telecom Engineer(Ericsson)
    SPJCM

  • Amit Shahani

    >Complete utilization of resource is not the best way of working. Optimum utilization of resource is the perfect and the most profitable way of working. Companies may not produce goods as per demand by consumers, which also may be a strategy of the company which makes them receive the maximum profit which they might not even receive by producing more units and meeting the demand. E.g. – kayanes bakery in pune. Every morning before the bakery opens there is a huge line of people waiting to enter and buy fresh baked cakes. Within maximum one or two hours all baked cakes are over from the shelf and it is not refilled by more cakes. This strategy is applied because the owner of the bakery wants to create this demand hype every morning for his shop so that people come in line to buy cake and if they don’t get the chance to buy the cake they leave the shop buying some other fresh baked product. With this the owner has two advantages. One, Hype in the market. Second, the sales of other baked items increases. Also we should not forget the most beneficial part for the bakery is the huge line waiting each day early morning and increasing the demand of the baked cakes and increasing the market value of the bakery, this would in turn increase the share value if the company is listed. Keeping all this in mind we should not forget our Unit costing. Producing amount of products which cost a minimum amount is feasible, but as soon as the unit cost of a product increases and profit margin reduces it’s better to stop producing that amount of units which would yield less or no profit. Because if we take just basic cost it would seem profitable but once we apply the activity based costing , producing those units might be actually generating loss for the company because the process used to produce those extra units might be much high and because of which it may reduce profit margin or even go into loss. So we can conclude that even if process is kept unutilized its better than over utilizing and making losses which could be avoided by producing that amount of units which meets maximum profit on per unit basis.
    Amit Shahani
    EmBA Batch 10

  • Deepak Bhatia – deepak.bhatia@spjain.org

    >Here, there is a company and its problem is that the demand for the product is not met properly, just merely by underutilization of resources and equipment. What the company and its manager should do is use all its resources and equipment to the right capacity if it does not what to even use at its maximum. The cost-volume-profit analysis (CVP), or break-even analysis, is used to compute the volume level at which total revenues are equal to total costs. When total costs and total revenues are equal, the business organization is said to be at a break even point, which is called break-even analysis.
    If a company is unable to meet the demand for its product it is sure to losses at the end of the financial year because it has not used resources and equipment up to the mark. CVP helps the company to know how much resources and equipment to use in order to make profits, it also help to know no profit no loss point in the company.
    Cost-Volume-Profit analysis is a planning tool which is extremely useful in predicting sales and profit. CVP has many assumptions:The behavior of costs and revenues is linear, Selling prices are constant, All costs can be divided into their fixed and variable elements, Total fixed costs remain constant, Total variable costs are proportional to volume, Prices of production inputs (e.g., materials) are constant, Efficiency and productivity are constant, The analysis covers a single product or a constant sales mix, Revenue and costs are being compared over a single volume base (e.g., units), Volume is the only driver of costs.

    Deepak Bhatia – deepak.bhatia@spjain.org
    (Roll Nbr. EWD10014)

  • Antonio Fernandes EMBA10

    >TR=FC+VC+OI/L
    While FC would remain constant for a certain level, one factor that would change is VC. The first consideration should be what is the BEP of the company? Ecnomically, it is not viable for any business to run if it is not able to recover even its fixed costs.
    As VC is the one most significant factor which changes with movement in production, a CA or Mgmnt Accoutant should explore the different variable cost elements. Alternatives can be explored. Volume production at different levels with relation to Variable costs would help determine the effect of costs. 100% capacity utilistion alone is not a guarantee to profits. It is a wrong notion. Profits can be still maximised at different levels of production and capacities. For example change from 1 shift to 2/3 shifts, change of working hrs. Order process, Material flow, etc ..these are all different variants which if explored and managed efficently and effectively can make a big difference to the profits. Wall mart makes huge profits purely through just in time strategy. Each company has to explore which strategy will work for them and the pros and cons.

  • LIMNAZ.MUSTHAFA- limnaz_musthafa@yahoo.com

    >This statement tells us that the organization is not using its resources that is labour and equipment to the fullest extent. The question asked here is that why is the organization doing this. We can apply the concept of CVP Analysis here. It measures the total revenues, total cost and operating income as a result of change in the output level, variable cost per unit , selling price and fixed cost. The concept of CVP Analysis helps us to understand how many units should be sold to reach breakeven.

    We can assume in this case for eg: labour is used up to 30% , and machines are used up to 40%, may be it can be assumed that the organization is reaching break even at this point. The point where total revenue is equal to total cost. In case of some products it need not use its entire resources i.e (labour and equipment) to fullest extent for arriving at profit. We can take the example of ‘PORSCHE’ which is a luxury car, and cannot be owned by the ordinary people, where they may not increase the supply of the car , creating a artificial demand. So here we are focusing on a particular class of customers which is known as the niche segment. For the PORSCHE they are making profit at this minimum point, where the resources are not utilized to the fullest extent. It depends on the type of products , moreover if the resources are used to the fullest extent there may be other indirect associated with it. Moreover the return on investment would be less because of the cost associated with using the resources.

    CVP Analysis tells us that the changes in the revenue and costs arise as a result of change in the no of products sold. If market demand grows the capacity utilization also rises. Excess capacity means that insufficient demand exists to warrant expansion of output. In economic statistics, capacity utilization is normally surveyed for goods-producing industries at plant level. The results are presented as an average percentage rate by industry and economy-wide, where 100% denotes full capacity. This rate is also sometimes called the “operating rate”. If the operating rate is high, this is called “overcapacity”, while if the operating rate is low, a situation of “excess capacity” or “surplus capacity” exists. One of the main features of the CVP analysis is that it is distinguishing fixed from variable costs. For a cost to be considered fixed or variable depends on the time factor, if the time period is shorter, higher the percentage of costs considered as fixed. CVP Analysis is useful in making decision about the strategic and long-range planning about the product pricing and planning. It is useful to determine breakeven quantities, and the target operating and net income. CVP Analysis is a useful tool for decision making.

  • Anonymous

    >Demand and manufacturing capacity are not the only factors which determines your profits.
    if the product is premium category one, then you can charge a premium if you limit the supply and let the natural demand mark your selling price. Of course you will have consider the fixed costs associated. But sometimes utilizing your plant capacity to the fullest may increase the variable costs associated [especially if your fixed costs follows a varying pattern]

    the Gist of the argument is that

    a) Nature of the product – is a key factor influencing the S.P.
    b) Capacity utilization may have costs associated with it.

    since CVP depends on the contribution margins associated, you will have to consider the above points as well.

    +/ashly
    Ashly Mathew Varghese [rollno :EI007]
    EMBA 10

  • Ribu V. Thomas

    >Capacity Utilization

    In Business and Economics Capacity utilization is a concept which refers to the extent to which an enterprise or a nation actually uses its installed productive capacity. Thus, it refers to the relationship between actual output produced and the potential output that could be produced with the installed equipment, if capacity was fully used.

    Capacity utilization can be measured in terms of capacity supplied, theoretical capacity and practical capacity. Capacity can also be measured in terms of demand, normal capacity utilization and master budget capacity utilization.

    Theoretical capacity is the level of capacity based on producing at full efficiency all the time. Whereas practical capacity is the level of capacity that reduces theoretical capacity by considering unavoidable operating interruption, such as schedule maintenance, shut down for holidays and so on.

    Nominal capacity utilization is the level of capacity utilization which satisfies average customer demand for over a period of time (say 3 years), which includes seasonal, cyclical and trend factors. Whereas master budget utilization is the level of capacity utilization that managers expect for the current budget period.

    The manager might have not gone for it because, the profit what it provides will not satisfy the cost incurred for it or even upto the present market level. Therefore he has decided to keep his work force idle till the next one. Since the market demand is very high there is no need to compromise on price.

    In addition, if he accepts a less profitable project & utilizes all the practical capacity, a new high profitable job has to be quoted at a very high price. Thus this may lead to loss of the project.

    He would have gone for the assignment, if the market demand was less. That is to atleast a small portion of the companies cost.

  • Varghese Mathew EMBA 10

    >Capacity utilization is a concept in Economic which refers to the extent to which an enterprise or a nation actually uses its installed productive capacity. Thus, it refers to the relationship between actual output produced and the potential output that could be produced with the installed equipment, if capacity was fully used.

    Capacity utilization can be measured in terms of capacity supplied and market demand. Capacity measured in terms of supply is theoretical capacity and practical capacity. While capacity can also be measured in terms of demand is normal capacity utilization and master budget capacity utilization.

    Theoretical capacity is the level of capacity based on producing at full efficiency all the time, while practical capacity is the level of capacity that excludes unavoidable operating interruption, such as schedule maintenance, shut down for holidays and so on from theoretical capacity.

    Nominal capacity utilization is the level of capacity utilization which satisfies average customer demand for over a period of time ,which includes seasonal, cyclical and trend factors, while master budget utilization is the level of capacity utilization that managers expect for the current budget period.

    For meeting the demand of a particular product a company cannot do mass production. We can produce up to an optimal level and remaining we can outsource, and meet the demand.

    Example: Apple unable to meet rising MacBook demand

    Apple Computer is facing a problem that it has not enough supply of its most popular products to meet growing demand. Apple struggling to fill orders for its consumer-oriented MacBook notebooks, which are arguably its most popular product. Company’s share of the US notebook marketing doubling to 12 percent during the six-month period ending June. Though it did not fulfill all of its notebook orders during its most recent quarter, they company still shipped a record 800,000 units. In an attempt to form a long-term solution to its notebook supply difficulties, the Mac maker has been scouring the far east for a third manufacturing partner to compliment current partners, Asustek and Quanta. With insiders believing Apple holds the potential to sell upwards of 1 million notebook systems during its December holiday quarter, the company will surely need the added help.

  • Ann

    >We should use the equipment to atleast its practical capacity so that we are utilising its capacity to the fullest, provided the revenue differential is greater than the cost differential. We should take into consideration the marginal cost, marginal revenue and the relevant cost to make right decision.We should find out the Cost volume profits to know the Break even point, the point where there is no profit and no loss which will help us to know up to what point we will be running at a profit by full utization of the equipment.
    ANN BABU RAJAN
    ann.babu@spjain.org
    SP JAIN,BATCH 10.

  • poo

    >The comment in this question can be valid in the following 3 circumstances:

    SITUATION A: Variable cost changes with Volume.
    eg. say using the process mentioned a product ‘X’ is created which has a sales price per unit of Rs.100. We assume that there is sufficient demand for this product (since the questions mentions so)- therefore everything that can be produced can be sold. We assume that the variable cost changes because the electricity consumption is charged at a higher rate when more electricity is used.
    We now need to compute the contribution margin for each level (in terms of volume) of production:

    1000 Units 2000 Units 3000 Units
    A. Sales Price per unit 100 100 100
    B. Variable Cost 80 87 95
    C. Contribution (A – B) 20 13 5
    PROFIT CALCULATION
    D. Total Contribution (C X Number of units sold) 20000 26000 15000
    E. Fixed Costs 10000 10000 10000
    Profit (D – E) 10000 16000 5000

    Clearly based on the above, it will not make sense to produce 3000 units even when the equipment capacity and idle labour exists.The idle equipment capacity will not be taken into account because the equipment has already been bought (i.e. Sunk cost).

    SITUATION B: Fixed cost base changes with shift in volume.

    1000 Units 2000 Units 3000 Units
    A. Sales Price per unit 100 100 100
    B. Variable Cost 80 80 80
    C. Contribution (A – B) 20 20 20
    D. Total Contribution (C X Number of units sold) 20000 40000 60000
    E. Fixed Costs 10000 25000 50000
    Profit (D – E) 10000 15000 10000

    Based on the above it makes sense to produce only 2000 units and not more.

    SITUATION C: A combination of situation A and situation B (i.e. both fixed cost & variable cost per unit changes with volume) –
    1000 Units 2000 Units 3000 Units
    A. Sales Price per unit 100 100 100
    B. Variable Cost 80 87 95
    C. Contribution (A – B) 20 13 5
    D. Total Contribution (C X Number of units sold) 20000 26000 15000
    E. Fixed Costs 10000 25000 50000
    Profit (D – E) 10000 1000 -35000

    Based on the above it makes sense to produce only 1000 units and not more.

    POOJA KAPOOR-EMBA 10-EWD10028

  • poo

    >Cost can be categorized into three types:
    – Fixed Costs
    – Semi-variable costs (this can be broken into fixed and variable costs)
    – Variable costs

    The comment in this question can be valid in the following 3 circumstances:

    SITUATION A: Variable cost changes with Volume.
    eg. say using the process mentioned a product ‘X’ is created which has a sales price per unit of Rs.100. We assume that there is sufficient demand for this product (since the questions mentions so)- therefore everything that can be produced can be sold. The fixed cost here would be the cost of factoring lighting, fixed salaries etc. – this will not change no matter how much we produce. Say the fixed costs are Rs.10,000The key here is the variable cost, say the variable cost per unit (raw material, energy cost to run the machine etc.) are as follows:

    0 – 1000 units per day Rs. 80 per unit
    1000 – 2000 units per day Rs. 87 per unit
    2000 – 3000 units per day Rs. 95 per unit

    We assume that the variable cost changes because the electricity consumption is charged at a higher rate when more electricity is used.We now need to compute the contribution margin for each level (in terms of volume) of production:

    1000 Units 2000 Units 3000 Units
    C. Contribution (A – B) 20 13 5
    PROFIT CALCULATION
    D. Total Contribution (C X Number of units sold) 20000 26000 15000
    E. Fixed Costs 10000 10000 10000
    Profit (D – E) 10000 16000 5000

    Clearly based on the above, it will not make sense to produce 3000 units even when the equipment capacity and idle labour exists. The production level would be pegged at 2000 units because this is the volume which will provide the highest contribution. The idle equipment capacity will not be taken into account because the equipment has already been bought (i.e. Sunk cost).

    SITUATION B: Fixed cost base changes with shift in volume.

    eg. Same as above but the variable cost remains at Rs. 80 per unit upto machine capacity of 3000 units. The fixed cost slab changes as follows:

    0 – 1000 units Rs. 10,000
    1000 – 2000 units Rs. 25,000
    2000 – 3000 units Rs. 50,000

    1000 Units 2000 Units 3000 Units
    C. Contribution (A – B) 20 20 20
    PROFIT CALCULATION
    D. Total Contribution (C X Number of units sold) 20000 40000 60000
    E. Fixed Costs 10000 25000 50000
    Profit (D – E) 10000 15000 10000

    Based on the above it makes sense to produce only 2000 units and not more.

    SITUATION C: A combination of situation A and situation B (i.e. both fixed cost & variable cost per unit changes with volume) –
    1000 Units 2000 Units 3000 Units
    C. Contribution (A – B) 20 13 5
    PROFIT CALCULATION
    D. Total Contribution (C X Number of units sold) 20000 26000 15000
    E. Fixed Costs 10000 25000 50000
    Profit (D – E) 10000 1000 -35000

    Based on the above it makes sense to produce only 1000 units and not more.

    POOJA KAPOOR-EMBA 10,EWD 10028

  • Zaheer

    >there could be two reason.

    1. the manager could be increasing the demand for the product by reducing the production. once the consumers know that a product is in demand and the production is low, the demand would increase and so does the price of the product.this could increase the profit margin.

    2. not utilizing the full production capacity of the production line for the product in demand could lead to killing the product as the the product mightgo out of the consumers mind.

    i would suggest to sack the production manager in this case

    zaheer
    emba 10
    10052

  • Russell Khambatta

    >One of the most important factors to consider while deciding the amount of units to be produced it the extra cost incurred in the production of more units.
    The point, at which the marginal revenue generated from the production of the marginal product becomes equal to the marginal cost, is the point at which production should stop. After that point, since the marginal cost starts becoming more than the marginal revenue, it starts eating into the profit. Obviously, this is a situation that is to be avoided.
    This is the holistic view.
    However, we now consider a situation where capacity is lying unused due to the decision not to produce more than what is indicated on the Cost-Volume-profit graph. This capacity could include the following resources:

    1. Manpower
    2. Plant and machinery
    3. Premises
    4. Transport and Logistics

    The options open to the management at this time are:
    1. Resize Resources and decrease costs
    2. Retain Resources and bear the costs until additional production becomes feasible
    3. Re-deploy resources in an area which will make them more profitable

    Applying each of these options to the type of resources:

    1. Manpower
    Resizing manpower is generally the most painful decision the management has to take. Apart from the social aspect of the ramifications, there are even graver economical impacts due to this. Manpower is generally a resource that gets better with age. This factors that make this phenomenon possible are: experience, a sense of loyalty of the employees, acquisition of skill sets, etc. Hence, hiving off employees is avoided unless it is with a voluntary retirement scheme where the older, less productive employees generally move out. Mostly, organisations tend to retain their manpower, bear the cost of their employment or transfer them to other production plants.

    2. Plant and machinery
    Once plant and machinery is fully depreciated on the books, they do not add to fixed costs. However, if these assets are not depreciated, management takes a decision to dispose them off in the used market if they curbs on production are deemed to be long run. Technology always gets cheaper and capacity can be added again later when times are better.

    3. Premises
    Premises are the most difficult to acquire, and generally the easiest to dispose of. If they are not used for production, premises could sometimes be used for storage, thereby reducing warehousing costs. This, of course, is not applicable to all types of premises due to constrain of production specific construction within the premises.
    Usually, management should lease unused premises on short term bases so that some income is obtained from them. If the production limitation is permanent, then the resource can be sold off and proceeds booked to the profit side of the balance sheet.
    4. Transport and Logistics
    If transport and logistics are outsourced, then resizing is the easiest option. However, if they are in-house, they represent resources for another business opportunity and should be exploited accordingly.

    Hence we see that limiting production is not always such a bad position to be in. if faced properly, it is either a temporary set-back to be overcome or in the long run, can be the knock of opportunity to diversify.
    -Russell Khambatta
    EMBA10, Dubai.
    russell.khambatta@spjain.org

  • KARUNA GURBAXANI (SPJAIN EMBA-10) EWD10022

    >Here, there is a company and its problem is that the demand for the product is not met properly, just merely by underutilization of resources and equipment. What the company and its manager should do is use all its resources and equipment to the right capacity if it does not what to even use at its maximum. The cost-volume-profit analysis (CVP), or break-even analysis, is used to compute the volume level at which total revenues are equal to total costs. When total costs and total revenues are equal, the business organization is said to be at a break even point, which is called break-even analysis.
    If a company is unable to meet the demand for its product it is sure to losses at the end of the financial year because it has not used resources and equipment up to the mark. CVP helps the company to know how much resources and equipment to use in order to make profits, it also help to know no profit no loss point in the company.
    Cost-Volume-Profit analysis is a planning tool which is extremely useful in predicting sales and profit. CVP has many assumptions:The behavior of costs and revenues is linear, Selling prices are constant, All costs can be divided into their fixed and variable elements, Total fixed costs remain constant, Total variable costs are proportional to volume, Prices of production inputs (e.g., materials) are constant, Efficiency and productivity are constant, The analysis covers a single product or a constant sales mix, Revenue and costs are being compared over a single volume base (e.g., units), Volume is the only driver of costs.

  • 駱李淑華明欣

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