,AOM4801 ASSIGNMENT 3
DUE DATE: 15 SEPTEMBER 2026
3.1 CAPACITY MANAGEMENT
3.1.1.1 Economic trade-off between the cost of capacity and the opportunity cost
of inadequate capacity
When an organisation develops a long-range capacity plan, it has to decide how much
production capacity it should have available to meet expected future demand. This
decision involves an economic trade-off because both excess capacity and insufficient
capacity have costs. The cost of capacity includes the investment required for
machinery, buildings, technology, employees, maintenance, energy and other operating
expenses. On the other hand, inadequate capacity can result in lost sales, dissatisfied
customers, production delays, stock-outs and lost market share (Russell & Taylor,
2011).
In the case of Mzanzi Home Appliances (Pty) Ltd, management must consider this
trade-off when deciding whether to invest in a dedicated air fryer production line. The
case indicates that demand for locally manufactured appliances has increased
significantly because of rising import costs, exchange-rate volatility and consumer
preference for affordable South African products. Air fryers may therefore represent an
important growth opportunity for Mzanzi. However, investing in a dedicated production
line would require a significant financial commitment before management can be certain
that demand will remain at the expected level.
If Mzanzi invests in the air fryer line and demand grows as anticipated, the additional
capacity could allow the company to produce larger volumes efficiently. It could reduce
production bottlenecks, improve delivery reliability and allow Mzanzi to respond more
quickly to customer orders. Adequate capacity is particularly important in a competitive
manufacturing environment because customers may move to competitors if a company
cannot supply products when required (Slack & Lewis, 2018). A capacity shortage could
therefore have an opportunity cost that extends beyond the immediate loss of one sale.
, Repeated stock-outs could damage retailer relationships, customer confidence and
Mzanzi's market share.
The opportunity cost of not investing in additional capacity could therefore be
substantial. If demand for air fryers continues to rise but Mzanzi does not have sufficient
production capacity, the company may have to turn away orders, increase overtime,
delay deliveries or rely on external suppliers. Competitors could take advantage of the
situation by supplying retailers and consumers that Mzanzi cannot serve. Capacity
decisions are consequently influenced not only by expected production costs but also
by the consequences of being unable to meet future demand (IBM, 2025).
However, investing too early or in excessive capacity also creates risks. If demand for
air fryers declines, the dedicated production line could operate below its efficient level.
Mzanzi would still have to carry fixed costs associated with the equipment, maintenance
and facility investment even when production volumes are low. This would increase the
cost per unit and could reduce profitability. A lead-capacity decision is particularly risky
when future demand is uncertain because the company commits resources before the
actual level of demand becomes known (Slack & Lewis, 2018).
Therefore, Mzanzi must compare the cost of installing and operating the new air fryer
line against the opportunity cost of not having enough capacity. If forecast demand is
sufficiently strong and the expected lost sales from inadequate capacity are greater than
the cost of the investment, expanding capacity would make economic sense. If demand
is highly uncertain, management should be more cautious and consider alternatives
such as overtime, temporary workers, subcontracting, additional shifts or incremental
capacity expansion.
The decision should consequently not simply be based on whether air fryer demand is
increasing. Mzanzi should consider expected demand, demand volatility, equipment
costs, labour requirements, energy costs, available floor space, maintenance costs,
production efficiency, product life cycles and the potential consequences of capacity
shortages. Capacity planning should balance market requirements with the resources
required to deliver those requirements efficiently (Slack & Lewis, 2018).
DUE DATE: 15 SEPTEMBER 2026
3.1 CAPACITY MANAGEMENT
3.1.1.1 Economic trade-off between the cost of capacity and the opportunity cost
of inadequate capacity
When an organisation develops a long-range capacity plan, it has to decide how much
production capacity it should have available to meet expected future demand. This
decision involves an economic trade-off because both excess capacity and insufficient
capacity have costs. The cost of capacity includes the investment required for
machinery, buildings, technology, employees, maintenance, energy and other operating
expenses. On the other hand, inadequate capacity can result in lost sales, dissatisfied
customers, production delays, stock-outs and lost market share (Russell & Taylor,
2011).
In the case of Mzanzi Home Appliances (Pty) Ltd, management must consider this
trade-off when deciding whether to invest in a dedicated air fryer production line. The
case indicates that demand for locally manufactured appliances has increased
significantly because of rising import costs, exchange-rate volatility and consumer
preference for affordable South African products. Air fryers may therefore represent an
important growth opportunity for Mzanzi. However, investing in a dedicated production
line would require a significant financial commitment before management can be certain
that demand will remain at the expected level.
If Mzanzi invests in the air fryer line and demand grows as anticipated, the additional
capacity could allow the company to produce larger volumes efficiently. It could reduce
production bottlenecks, improve delivery reliability and allow Mzanzi to respond more
quickly to customer orders. Adequate capacity is particularly important in a competitive
manufacturing environment because customers may move to competitors if a company
cannot supply products when required (Slack & Lewis, 2018). A capacity shortage could
therefore have an opportunity cost that extends beyond the immediate loss of one sale.
, Repeated stock-outs could damage retailer relationships, customer confidence and
Mzanzi's market share.
The opportunity cost of not investing in additional capacity could therefore be
substantial. If demand for air fryers continues to rise but Mzanzi does not have sufficient
production capacity, the company may have to turn away orders, increase overtime,
delay deliveries or rely on external suppliers. Competitors could take advantage of the
situation by supplying retailers and consumers that Mzanzi cannot serve. Capacity
decisions are consequently influenced not only by expected production costs but also
by the consequences of being unable to meet future demand (IBM, 2025).
However, investing too early or in excessive capacity also creates risks. If demand for
air fryers declines, the dedicated production line could operate below its efficient level.
Mzanzi would still have to carry fixed costs associated with the equipment, maintenance
and facility investment even when production volumes are low. This would increase the
cost per unit and could reduce profitability. A lead-capacity decision is particularly risky
when future demand is uncertain because the company commits resources before the
actual level of demand becomes known (Slack & Lewis, 2018).
Therefore, Mzanzi must compare the cost of installing and operating the new air fryer
line against the opportunity cost of not having enough capacity. If forecast demand is
sufficiently strong and the expected lost sales from inadequate capacity are greater than
the cost of the investment, expanding capacity would make economic sense. If demand
is highly uncertain, management should be more cautious and consider alternatives
such as overtime, temporary workers, subcontracting, additional shifts or incremental
capacity expansion.
The decision should consequently not simply be based on whether air fryer demand is
increasing. Mzanzi should consider expected demand, demand volatility, equipment
costs, labour requirements, energy costs, available floor space, maintenance costs,
production efficiency, product life cycles and the potential consequences of capacity
shortages. Capacity planning should balance market requirements with the resources
required to deliver those requirements efficiently (Slack & Lewis, 2018).
