Are there any aspects of your school's activities that could be outsourced? Would it be beneficial for the school to go that route?
Your maximum possible output is determined by what all of your existing resources can produce in a specific time (land, capital, labor).
There is a direct relationship between capacity utilization and fixed costs:
High capacity utilization helps spreading fixed costs over larger number of units (low unit fixed cost);
A low capacity utilization, on the other hand, mean that the totality of fixed costs are borne by fewer units (high unit fixed cost).
Example:
Activity 25.1
Would operating at full capacity be the best case scenario then?
Although it may seem as the best to do operating at full capacity carries various drawbacks:
It doesn't allow for scheduling errors to happen putting pressure and a heavy workload on staff;
A customer willing to increase orders will have to be turned down leading to the loss of some customers in the long-term;
Maintenance might be overlooked and bring larger problems in the long-run.
Some businesses face the problem of short-term excess capacity (seasonal) which can increase their average unit costs. What should businesses do when facing such issues?
Businesses might choose to keep high output levels even when out of season to stock up for future expected high sales - costly and risky solution;
Allow for production flexibility of other products during off-season - may require investment in staff, machinery, and materials;
Implement a flexible contract-only policy during high peak seasons - leading to lower motivation, morale, quality, and need for training.
The problem could be worse though: long-term excess capacity due to technological development, change in taste, or economic recession.
In such cases business can adopt to different strategies:
Investment in promotion to try and raise demand;
If promotional efforts do not succeed:
Rationalization can be an alternative: reducing capacity by cutting overheads (e.g. closing factories, offices, and causing redundancies).
Rationalization can, however, lead to deeper issues in case demand eventually rises.
Another option would be to invest in R&D of new products:
It can prevent rationalization and the problems that come together with it;
New products will replace existing ones and make use of idle capacity;
R&D is expensive and time-consuming (might not be timely to prevent rationalization);
New products are likely to be unsuccessful if rushed into introduction.
Activity 25.2
Chapter 25 - Capacity Utilization and Outsourcing
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