Cambridge A Level Business Studies | Chapter 25 - Capacity Utilisation (Part 1)

hello everyone i'm fyres khan and um today uh i'm back uh with a new class with a new chapter so today i have business studies cambridge a2 um so uh yeah let's wait for our viewers to join uh for our students to join all right so we are uh in chapter 25 we have to start a new chapter today so uh yes um please um do not hesitate to like our facebook page firo's education services uh you can also subscribe to our youtube channel um fires education services again we have a lot of learning materials and we are uploading every day so uh yeah every week actually and uh you can also send me friend request first khan because i also stream all the live classes for free on my personal page as well so uh yeah if you guys are here i think there are some few viewers here i think we should start we should go i hope you can hear me properly uh i hope the internet connection is good uh i took around 5-10 minutes to check the connection uh because previously there were problems so okay the picture that you can see um the picture that you can see here is a picture of a restaurant okay let's say this restaurant's capacity maximum capacity or the maximum number of customers they can fit is 150 that's your maximum output capacity you can fit in 150 customers 150 diameters 150 people can eat at once at one go that's your maximum output capacity and your current capacity is how many people do you have every day for dinner or lunch or how many people visit you every day in your restaurant your maximum capacity is 150 but every day you have 120 customers that's your current capacity so you're using how much you're using out of your maximum capacity it's 120 you can you can't fit in 150 people but at this moment you are feeding 120 people every day that's your current capacity and your spare or excess capacity is this the needs that is left because you're not running at full capacity running at full capacity means if i have 150 seats i will feed 150 people that's running at full capacity but we are not running at full capacity here we we feed 120 people every day so the spare capacity if you just subtract very simple if you just subtract it's 30 okay that's your spare capacity now if you want to know that how much what is the percentage of your capacity utilization you can easily find out it's so easy so what you can do is 120 okay take the current capacity that you do every day take that divided by maximum output capacity what is your maximum capacity 150 in 200 and that is 80 so out of 100 you're using 80 percent of the restaurant seats every day so that is your capacity so 80 is a good number okay out of 100 uh you're using 80 of your production facility that's good you're making good profit you're using uh more of your resources so that is a positive number okay so your maximum capacity is 150 that's the total people that you can have in your restaurant but currently you're feeding or you have 120 customers so that's not full capacity okay full capacity means if we if we feed or if we have 150 people every day then we'll we will be running at full capacity but currently it's not so your spare capacity just minus 150 minus 120 um the number of seats that's left every day that's 30 30 seats and you can find your percentage by simply 120 your current capacity divided by maximum output capacity which is 150 into 100 at this moment this restaurant uses 80 percent of the seeds uh which is a good number which is a good number not bad so they're they're using 80 percent of the resources uh now let's go ahead let's have a look at one more example uh uh we will have a look we will look at more let's say the industrial side let's say uh you're a textile factory let's say uh you have a textile factory and your maximum capacity is look here look your maximum output capacity let's say it's 150 tons or 150 metric tons that's what you do that's much that that's how much you produce every day thread or or clothes anything okay that's your maximum capacity 150 tons now what is the current capacity how much are you producing at this moment this is what you are capable of at this point you are doing 130 tons you're capable of 150 but you're doing 130 tons because that's the order that you have so your spare capacity as you can as you have guessed uh from now um it's 150 minus 130. that's 20 tons okay now if we have to find the the the current capacity percentage we will simply take 130 divide by 150 into 100 and and that is 87 so this factory uses 87 of its resources which is good which is again a very high amount more than more than the restaurant that we've compared okay so so it is a good amount now the more capacity you use the better it is uh why we will talk about it but then there are disadvantages also but this is the chapter about it's about capacity utilization okay if you have any questions please do not hesitate to comment on the section here uh type in on our page fires education services if you comment on fyro's khan profile i will not be able to see so make sure you comment on fireworks education services so i will be able to see there's a problem with the system i'm trying to fix the comment uh thing here but then yeah so this is what the chapter is about so capacity utilization is the proportion of maximum output so what is your capacity utilization we know maximum output is 150 your current capacity is 130 tons and if we want to find out the percent this is the math that we need to do so what is the proportion of what is your propo you know capacity is what is the proportion of maximum output that you do at this point and this is the formula current output level divided by maximum output level in 200 that is the rate of capacity utilization so 87 is the rate of capacity utilization so capacity utilization is the proportion of maximum output capacity so our maximum output capacity is 150 tons now what is our capacity our current capacity is 130 okay so that is our capacity utilization and the rate is 87 as simple as that okay let's go ahead so so there are two impacts that you need to think about because i told you that you know if you have full capacity utilization if you let's say your capacity is 150 and you are currently operating at 150 tons that's very good for you you are you're at full capacity if your restaurants has 150 seats and you are being able to feed 150 people that is very very good because you are running at full capacity when you run at full capacity or when your capacity rate is high when your capacity utilization is high what happens is your average cost falls your average cost becomes less again economies of scale the more you produce uh you know average cost per unit will fall so that's what impact on average cost average cost will fall um we will have a look at one more example again think about uh think about a hotel which has 100 rooms okay now in any business you have a break even uh break-even point every day or every month uh let's say break even for this hotel is 2500. whether you run at full capacity or whether you don't run at full capacity uh whether your rooms are fully booked or half booked every day your fixed cost or your cost is 2 500 so that's a lot of money so when when you're when 100 rooms are occupied let's say in a very good day when 100 rooms are occupied your average cost is 25 only but if your uh hotel is uh you know half booked if only 50 rooms are booked just look at this if 50 only 50 rooms are out of 100 rooms then your average cost it rises to 50 from 25 so we can we can guess from here that uh the more busy you are the better it is for average cost if you're running ad if you're running at full capacity if you're running at full capacity uh then what happens is uh uh you know uh your average cost will fall down so it is 25 when all hundred rooms are booked okay so when uh and and when only fifty percent of the rooms are booked it's fifty dollars so note that the more customers you have the more clients you have the more orders you have the average cost per unit will fall and this simply relates to economies of scale okay there we go economies of scale so think about that so one of the one of the advantages of running at full capacity so if you have 150 seats let's say all your 150 seats are booked uh if your production capacity is 150 metric tons that's all you are producing 150 metric tons so what is the advantage of that the first advantage is unit cost will be very low and you will make more profit and and we have seen that from this example right so unit cost will be very low and you can also say that you know we are very busy and that means you are successful that means you're getting more orders and getting more orders show that as a business you are successful the second point okay the third point is there's a sense of security there's a sense of pride that you guys have worked um you know the workforce the employees will be motivated there'll be a sense of security a sense of pride so these are three advantages of operating at full capacity the cost will be very low you will enjoy economies and scale because you're running at full capacity and therefore you'll be able to make more profits number two it shows that as a business you are successful number three uh the workforce the employees will have a sense of security will be motivated because they have lots of work to do so these are the advantages of operating at full capacity now there are drawbacks also if you have 150 seats you're booking you're taking 150 seats every day that also has a drawback what drawback does it have staff may feel under pressure every day they have so much to do it may increase their raise their stress levels so they may feel under pressure i used to work for this restaurant when i was a student in the uk every day it was busy it was a it was a i think 70-seater restaurant uh they had 70 seats in the restaurant and every day it was fully booked and we used to be very tired when we got back home at 12 o'clock so uh you know staff may feel under pressure it may increase the stress level okay sometimes the business may get too busy and regular customers may be turned away because the business is very busy right every every time busy let's say this there are there there is queue outside you've seen businesses right you can align high abide it or wait good day and and you get demotivated okay and the third drawback is and it's a very important drawback staff machineries everyone will be working flat out you're not giving any kind of rest period now if i use my phone 24 hours a day it's not good for the device it's not getting a rest period so machineries will be working flat out and that is not good so that is the third the third drawback that we can see and you know machines they need repair they need maintenance so that's there's so three advantages of running at full capacity let's say you have 150 seats and you you you can you serve 150 uh customers every day the advantage of that is unit cost will be very low average should cost you will enjoy economies of scale uh as a business you're successful there's no spare capacity or excess capacity and employees will be motivated they will have a sense of security but however staff may feel under pressure under stress regular customers may be turned away because you're so busy you can't take them and third machineries will be working flat out you need to maintain them you need to repair them okay so that's that if you have any questions please do not hesitate uh to comment on the comment section and i will be taking all your questions and uh yeah let's go ahead so excess capacity what is excess capacity and we we have talked about it here so excess or spare capacity is let's say your maximum capacity 150 spare capacity is or current capacity uh the capacity that you're producing at this moment is 130. so your spare capacity will be

150 minus 130 how much you can produce more what is left after you produce so that's your spare or excess capacity right excess capacity exists when the current level of demands are less than the full capacity output let's say your full capacity is 150 metric tons but your current level is less than that let's say it's 130 it's 120 110 okay so uh excess capacity's potential output minus actual output potentially you can produce 150 metric tons or you can have 150 customers but now you have 110 so your excess spare capacity is is uh you know 40 or 30 okay so that's that and and this happens sometimes sometimes or most of the times you produce under your capacity because of let's say seasons because it's summer break or because it's eid vacation or ramadan or christmas vacation it happens um due to special situations like covet 19 okay it happens right so there you go so that's excess capacity now if you have less excess capacity that's okay 10 tons 20 tons 20 30 that's fine but if it's beyond that then it's a problem your cost will start increasing so you have to be careful in a way okay let's go ahead rationalization is all is a concept which means you want to cut down overhead cost sometimes you will hear in the news or you will hear your family members say that you know factory to bondo uh uh workers uh saudi aflam you know getting rid of workers or making the workers redundant that is rational rationalization rationalization means cutting down cost okay because you want to focus on production uh you don't want anything to go wrong that's why you cut back on cost you can cut back on cos is by getting rid of employees uh shutting down factories shutting down departments or shutting down f uh you know uh other sections uh that is rationalization okay and and rationalization is used everywhere uh uh you know uh uh to cut down cost to make the production more efficient so um yeah there you go so that is rationalization um so what happens when you have excess capacity in the short run so let's have a look at some of the instances okay let's say if you have um uh you know you if you have let's say your maximum capacity is 150 tons but at this point you have uh you know 100 tons order so you have an excess capacity of 50. so what do you do there are two options you can maintain output and produce for stocks you can you can you can produce goods for 150 tons okay and you can store them for later use to sell it uh later but option two you can do option two which is you know hire part-time workers produce other products flexi you have flexible equipment and produce other products um or you work three days a week you can also do that for example a lot of pharmacy companies are not producing any kind of medicine what they're doing is they're making masks they're making sanitizers because uh people are not buying other medicines people are focusing on these things because of covid19 so instead of making those regular medicines you can make sanitizers because that is selling really well so you have two options you can either carry on what you were doing okay because those products will be needed later on or you can hire part-time staff you can hire temporary staff you can have flexible equipment you can make other things uh you can have short term working instead of working for seven days uh you can just work for uh three days or four days okay that's what you can do so uh yeah there we go um so we will have a look at uh you know advantages of this if you just don't think about anything if you just don't care about anything and if you just produce let's say clothes or or food for 150 people what happens um you don't need part-time staff everybody will be motivated everybody will have job security you don't need to change production schedules and um uh you know uh you make stocks and stocks can be sold later so uh let's say i don't have demand for these kind of diaries now but there will be demand after three months so i will just keep on producing and i will store it in a warehouse and i can sell it later so there is no point of changing my production line there's no point of you know changing my um you know workers or getting rid of them no i don't need to do that okay i can just produce this is a diary i can store it if it was a if it was food or drink i would think about it because those are perishable goods it's a diary or since let's say it's a phone or a pen i can store them so i will store it i will make it and store it okay but the disadvantage to that is it cannot be used as i told you it cannot be used for perishable stocks uh it cannot be used for i'm having a grape juice it cannot be used for a cream juice it cannot be used for fruits it can be used for frozen food because and then also you have to keep in mind about your stock holding cost when you hold stocks it increases your cost because you need a warehouse to store them and that may increase your cost substantially okay uh and and let's say i'm storing this item but demand may not increase there's no guarantee that your demand will increase for this there is no no guarantee and the goods may also get damaged so these are the advantages and disadvantages for option one uh when you have excess stock what you can do is you you don't care about anything just maintain output and produce for stocks these are the advantages okay and these are the disadvantages but if you go for option two if you have excess capacity option two is hiring part-time or temporary labor having flexible equipment and producing something else rather than your main product uh short-term working conditions so the advantages is that uh you know production can be reduced you can you can reduce your production so you're not going for waste you're reducing waste okay and other products can be made so now uh let's say nobody is having uh let's say um nobody is using uh let's say headache medicine but now everybody is using sanitizers so let's say we're a pharmaceutical company to make sanitizers it's so easy so instead of making other medicines we will focus on sanitizers we'll focus on making medical gloves and masks because they are being sold right they they are in huge demand so we can make other products if we have flexible machines and it avoids stock building up because when you build up stocks there is no guarantee whether you can sell them in the future or not there is no guarantee as such okay uh costs will rise goods make it damaged what do you do then but however the disadvantage is that staff may be demotivated because you will make them temporary workers you will call them whenever you need them probably you will get rid of them make them redundant because you don't have orders then having then having fully flexible machine can be very very expensive so what do you do then if you fully flexible machine means actor machine so those kind of machines are quite expensive right then third staff need to be trained to to use those kind of machines and it may add to the cost okay so there we go we've uh we'll stop here and we finished quite quickly we finished smoothly 25 minutes in so today's chapter was about this capacity utilization okay capacity utilization means how much capacity are you using compared to your full capacity compared to your maximum capacity i've given you an example of a restaurant okay let's say a restaurant can have 150 customers now but every day you feed 120 customers let's say your excess capacity the seeds that are left is 30. now if you find if you want to find the rate of capacity utilization just divide 120 by 150 which is your current capacity divided by maximum output capacity into 100 it's 80 80 is good 82 is good not bad it is good i would say averagely good then let's have a look at a factory let's say maximum output capacity is 150 metric tons but they're not producing at full capacity okay they're producing at 130 tons which is very very good spare capacity is very less 20 just 20 okay and if you want to find the rate of capacity utilization 130 divided by 150 into 100 87 this is a good amount but running at full capacity is good if you have 150 metric tons if you can produce 150 metric tons that's an advantage okay yeah the formula is here there you go so that's an advantage because your average cost will fall it'll have an impact on your average cost the more you produce the better it is for you okay we've also seen an example of a uh of a hotel that's a hotel has a hundred room now the fixed cost of the hotel is two thousand five hundred dollars when you have all hundred rooms booked your average cost is just 25 but then when only 50 of it's booked then your average cost rises to 50 so note that the more customers the more clients the more orders you have your average cost per unit will fall and that that is economics of scale okay what are the advantages of running at full capacity there you go low cost you'll feel successful you have sense of security sense of pride drawbacks staff may be under pressure missionaries will be working 24 7 and that's not good and regular customers may be turned away okay and we've talked about excess capacity we've talked about rationalization cutting down of extra cost overhead cost shutting down factories uh making workers redundant okay and when you have excess capacity let's say you have 150 tons but you're producing at 80 90 tons so that's not a good average so what should you do so you have two options you can maintain your uh your current uh stock level which is your 150 and you can stock the items and sell it later or you can take option two uh you know get rid of employees or make them part time or temporary for a full time uh have flexible equipment and produce something else and we've talked about the advantages and disadvantages for both the options right so we will stop here it was a great class we finished half of this chapter tomorrow we'll finish the whole chapter and and yeah we'll be done with this chapter so great thank you very much i will see you again if you have any comments do not forget in the comment section so uh yeah i have a bit of cold as usual uh so uh yeah great thank you i will see you again

2021-04-08 15:10

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