Business Management HL: Cost or Buy Decisions

Capacity Utilisation

the percentage of a company’s total capacity that is currently being used. When capacity utilisation rates are higher, the average fixed costs will fall because they will be divided by a larger output.

Capacity

maximum possible output

Spare capacity

potential additional output that is not currently being realised

under utilisation

operating below full capacity

under utilisation

more time for maintenance, repair, training and improvement

less pressure on workers

ability to cope with sudden increase in demand

under utilisation limitations

higher production of fixed costs per unit

lower profit levels, increase price, lower sales volume

negative brand image

lack of motivation

over utilisation

operating close to full capacity

over utilisation benefits 

reduced average costs and increase profit

fixed costs spread across higher output 

positive brand image

increased motivation

over utilisation limitations

too much strain on resources

stress on staff

no time for maintenance or training

quality can suffer

damage reputation

factors affecting make or buy decisions (quantitative)

total and average costs

defect rates

capacity utilisation

productivity rates 

cost of logistics

capital expenditure

profitability

factors affecting make or buy decisions (qualitative)

quality management 

reputation

ethical implications

availability of factors of production

changing demand

supply chain reliability and lead times

specialisation

Reasons to make

quality and cost control through vertical integration

protecting intellectual property

meeting global and local responsibilities

Reasons to buy

specialisation and expertise

low costs due to economies of scale

lower fixed costs