This resource provides an example of. an activity for a topic within Theme 2.

Transcription

1 Planning Click to edit activity: Master Theme title style 2 Click to edit Master text styles This resource provides an example of an activity for a topic within Theme 2. The Planning Activity document suggests how this resource can be incorporated in lessons.

2 Capacity Click to edit utilisation Master title style Click to edit Master text styles Are you working hard enough?

3 Click to edit Master title style Click to edit Master text styles How many Third level hours homework could you do each evening?

4 Click to edit Master title style Click to edit Master text styles How many Third level hours homework could you actually do» Fifth each level evening?

5 Click to edit Master title style Click to edit Master text styles How many Third level hours homework could you do each evening? This is your full capacity.

6 Click to edit Master title style Click to edit Master text styles actual hours Third level worked each evening x 100% full capacity e.g. 1 hour x 100% = working at 33% capacity 3 hours

7 Click to edit Master title style Miah Enterpises Ltd produces state of the art widgets using the most up-to-date capital equipment Click to edit Master text styles The Second machine level is capable of producing 10,000 units per week. Fourth level Widgets are produced to order. Sales are currently 8,000 per week. actual output per week/month/year x 100% full capacity a)what is total capacity? b)what is actual output? c)calculate capacity utilisation

8 Click to edit Master title style The machine is capable of producing 10,000 units per week. Widgets are produced to order. Sales Click are to edit currently Master 8,000 text per styles week. Fixed costs are currently Second level 10,000 per week. a)calculate fixed costs per unit at full capacity b)calculate fixed costs per unit at the current level of sales c)what will happen to fixed cost per unit if the firm gets closer to full capacity? d)what impact will this have on profit?

9 Click to edit Master title style Selling price = 10/unit Variable Click to cost/unit edit Master = 2/unit text styles Gross Second margin level = 8/unit If fixed cost per unit = 1 then profit will be 7/unit If fixed cost per unit = 1.20 then profit will be 6.80/unit

10 Click to edit Master title style Selling price = 10/unit Click to edit Master text styles Variable cost/unit = 2/unit Gross margin = 8/unit If fixed cost per unit = 1 then profit will be 7/unit Fourth level Variable cost /unit = 2 At full capacity, fixed cost per unit is 1. Unit cost = 3 Selling price unit cost = 7 profit per unit. If fixed cost per unit = 1.20 then profit will be 6.80/unit At 80% capacity, fixed cost per unit is 1.20 Unit cost = 3.20 Selling price unit cost = 6.80 profit per unit.

11 Make Click up to edit your Master own business title style example Click to edit Master text styles Make up Third a level name for your business Full capacity Actual output Total fixed costs Variable unit cost Selling price per unit

12 Click to edit Master title style Copy these details from your partner Click full capacity to edit Master text styles actual Second output level total fixed costs variable unit cost selling price per unit

13 Click to edit Master title style a)what is total capacity? b)what Click to is edit actual Master output? text styles c) Calculate Second capacity level utilisation d)calculate fixed costs per unit at full capacity e)calculate fixed costs per unit at the current level of sales f) What will happen to fixed cost per unit if the firm gets closer to full capacity? g)what impact will this have on profit?

14 Low Click capacity to edit Master title style Click to edit Master text styles Causes could be: Demand side: e.g. product less fashionable e.g. product seasonal e.g. product income elastic in a recession Supply side e.g. new competitors

15 Low Click capacity to edit Master title style Click to edit Master text styles Consequences could be: High Third fixed level costs/unit will reduce profitability (may not be possible to increase prices) If visible could give a poor impression to potential customers Underused staff

16 Is Click low to capacity edit Master always title a style problem? Click to edit Master text styles In the long term yes High Third fixed level costs/unit will make the firm uncompetitive In the short-term possibly not It means that the firm can react quickly to a new order (could be useful if the firm is expanding into a new market) Time for maintenance and staff training So, it depends if it is a short-term or long-term problem

17 Full Click capacity to edit Master title style Click to edit Master text styles Good because fixed costs per unit are lower But Leaves no time for maintenance (could lead to breakdowns) Not possible to take on unexpected orders (the only way to increase output would be to buy a new machine) So 85-90% capacity might be better

18 Capacity Click to edit utilisation Master title style Click Capacity to edit is the Master v text styles of output a firm is capable of producing. Capacity utilisation Second measures level actual output as a percentage of the firm s capability. If the maximum» capacity Fifth level is 10,000 units a month and the actual output is 6,500 units, capacity utilisation is %. As fixed (o ) costs are related to maximum capacity, if the firm has low capacity utilisation, its fixed costs per unit will be and so too will be its average total costs per unit.

19 Capacity Click to edit utilisation Master title style Click Capacity to edit is the Master volume text of styles output a firm is capable of producing. Capacity utilisation measures Second actual level output as a percentage of the firm s capability. If the maximum capacity is 10,000 units» Fifth a level month and the actual output is 6,500 units, capacity utilisation is 65%. As fixed (overhead) costs are related to maximum capacity, if the firm has low capacity utilisation, its fixed costs per unit will be higher and so too will be its average total costs per unit.

20 Capacity Click to edit utilisation Master title style Click Capital to intensity edit Master raises text a styles separate issue. To what Second extent level are the total costs of the business weighted towards fixed capital (such as machinery)? Or is the business labour intensive, i.e. labour costs form a high proportion of total costs? The former case is more likely to be true of large firms (especially in the manufacturing sector) whereas the labour intensive firms are more likely to be firms especially in the sector.

21 Capacity Click to edit utilisation Master title style Click Capital to intensity edit Master raises text a styles separate issue. To what Second extent level are the total costs of the business weighted towards fixed capital (such as machinery)? Or is the business labour intensive, i.e. labour costs form a high proportion of total costs? The former case is more likely to be true of large firms (especially in the manufacturing sector) whereas the labour intensive firms are more likely to be smaller firms especially in the services/tertiary sector.

22 True Click or to false? edit Master title style Click Low capacity to edit Master utilisation text means styles low unit costs. Low Second capital level intensity means high labour costs per unit. High labour» Fifth intensity level may mean high costs but high flexibility and good customer service. High capacity utilisation keeps unit costs down as machinery and staff are being used productively. An increase in capital intensity might lead to redundancies.

23 Click to edit Master title style Six months ago, John Collins started up a retail business with overheads of 4,000 per week, including 900 on staff, 700 on rent Click and to the edit rest Master on the cost text of styles leasing a state-of-the-art automated supply system. This enables customers to order over the Second phone, the level internet or in person, and a robotic stockpicking system Third finds level the item and delivers it to a collection bay. Current unit Fourth sales level of 7,200 per week are close to the system s maximum capacity of 8,000 units. a)calculate the firm s % capacity utilisation b)calculate the capital intensity of John Collins business. c)a rival retailer has a labour intensity of 70%. Identify one advantage and one disadvantage to John Collins of its capital intensity.

24 Click to edit Master title style Calculate the firm s % capacity utilisation Click to edit Master text styles 72/80 = 90% Calculate the capital intensity of John Collins business. 24/40 = 60% A rival retailer has a labour intensity of 70%. Identify one advantage and one disadvantage to John Collins of its capital intensity. Advantage: speed, low wage costs Disadvantage: less face-to-face customer interaction, customer service poorer

25 Click to edit Master title style JT Co s fixed overheads of 600,000 a month pay for a maximum capacity of 200,000 units. Variable costs are 2 per Click unit, to the edit selling Master price text is styles 8 and current demand is for 120,000 units. a)what is JT Co s capacity utilisation? b)calculate JT Co s fixed costs per unit at 120,000 units and at maximum capacity c)explain how the above data enable you to know that JT Co s profit margin is 1 per unit at sales of 120,000 units, but 3 per unit at maximum capacity. d)calculate the % increase in the firm s total profit that would result from a sales increase from 120,000 to 200,000 units.

26 What is JT Co s capacity utilisation? Click to edit Master title style 12/20 = 60% Calculate Click JT to Co s edit fixed Master costs text per styles unit at 120,000 units and at maximum capacity 60/12 = 5; 60/20 = 3 Explain how the above data enable you to know that JT Co s profit margin is 1 per unit at sales of 120,000 units, but 3 per unit at maximum capacity. 8-2 = 6; 6-5 = 1; 6-3 = 3 Calculate the % increase in the firm s total profit that would result from a sales increase from 120,000 to 200,000 units /120 = 48/12 = 400%