Capacity utilization is the extent to which the productive capacity of a business is being used.
Hmm this defines capacity utilisation but doesn't relate directly to the case study and neither does it tell me what capacity is...hmm....
Firstly, if someone were to invest in a business in order for them to increase their capacity utilization, then it may be a worthwhile cause as increased capacity utilization means that there is more output with the same amount of production.
This seems very odd. I produce the same amount but produce more...? I am pretty sure the writer meant the same amount of machines and other resources. I would feel so much better if capacity utilisation had been fully explained and then directly related to the case study. I think it is time to go and read this...
This comes with a decrease in the average fixed costs per unit in production, which therefore means that they are spending less of their profits on repaying their costs and so profit is larger.
Hmm this is odd too. So have fixed costs reduced? If not why are they spending less of their profits? Doesn't make sense to me. Also have profits changed? Hmmmm
With a larger profit, it promises a higher return on investment for the original investor and so would be more attractive to the investor to start with.
I wonder why profits have risen....
For example, the initial £230million invested by BMW to the Oxford Cowley plant did exactly this. It allowed a new mini to be designed and the firms cut their costs by having more efficient machinery.
I wonder which costs they cut as machinery is very expensive!
As more capacity was being utilized effectively the sales took off and the demand for the car increased dramatically,
I wonder why capacity utilisation affects demand...this response doesn't explain this
highlighting how increased capacity utilization from an investment can increase demand significantly.
However, the benefits of investment as a means of increasing capacity utilisation are limited. The success of the investment is dependent on the sort of business concerned and how it is coping in relation to its competitors and in the current economic environment ect. If the business is struggling in a financial crisis and the actual product they sell has a very low demand regardless of its price elasticity, then even an increase in capacity utilization would not give enough benefits for it to be worthwhile.
This looks like a clear attempt at evaluation - obviously a good student!
The costs would be cut but demand for the product will remain low in the short term, and the business runs the risk of now having a supply surplus of their own product which may lead to wasted resources.
Another good point - and always a good idea to bring short term/long term in. Clearly this person has an excellent teacher!
This then leads to an increase in costs, and leave the business at an overall bigger disadvantage than prior to the investment.
For example, Silentnight was struggling in the financial crisis and had a fall in sales of 40%, highlighting a severe lack of demand for their mattresses. This lead to the closure of one of their factories and although it was severely underutilized, it is unlikely that an investment would have helped the business much further as even though they would be more efficient at producing the mattresses, there is still a lack of interest for the product itself and so little revenue would be earnt, and therefor little profit.
Referring back to the case study - great! Now I will go and read the judgement.
Oh...there isn't one
That teacher should lose his job...
