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Educating the world for a better change
,Elite Academic Institute 068 053 513 262 1185
WARNING: PLEASE NOTE THAT PLAGIARISM IS A SERIOUS ACADEMIC
OFFENSE, therefore, the documents provided here including past assignments, tests
and notes are intended SOLELY for educational purposes and as a guide to help
students understand academic concepts and improve their writing skills. These
materials should not be submitted as final work, as doing so may constitute academic
dishonesty. Students are encouraged to use them as reference points, develop their
own understanding and produce original work that reflects their knowledge and critical
thinking. Students are also encouraged to regenerate their own (personalized)
solutions paying particular attention to module contents as prescribed by module
facilitators, lecturers and supervisors. If this document is plagiarized by the users and
fails, ELITE ACADEMIC INSTITUTE should not be rendered accountable since the
contents in this document only give learners a kick-start on what is expected of them
from their areas of specialty.
CAUTION: STUDENTS ARE NOT MANDATED TO USE ALL THE INFORMATION IN
THIS DOCUMENT IN WRITING THEIR ASSIGNMENTS
Educating the world for a better change
,Elite Academic Institute 068 053 513 262 1185
ENJOY!
QUESTION 3.1 CAPACITY MANAGEMENT
3.1.1 ABW have recently built a new production facility at Rosslyn, Pretoria, for
the ABW 5-Series. With reference to their new production facility, elaborate on
the economic trade-off between the cost of capacity and the opportunity cost of
not having adequate capacity. (4)
ABW's recent construction of a new production facility for the 5-Series at Rosslyn,
Pretoria, necessitates an understanding of the economic trade-off between the cost
of capacity and the opportunity cost of not having adequate capacity.
The Cost of Capacity
Capacity costs, as highlighted by Collier and Evans (2021), encompass all
expenditures associated with acquiring, operating, and maintaining the facilities and
equipment necessary to support production. For ABW, this primarily refers to the
substantial capital investment required to establish their new production facility,
including land acquisition, construction, installation of machinery, and procurement of
advanced manufacturing technology. Such investments are typically long-term in
nature and represent a significant financial commitment that directly influences the
organization’s ability to meet current and future demand. In addition to the initial outlay,
capacity costs also include the recurring annual expenses associated with the
operation and maintenance of these assets. These may cover costs such as utilities,
equipment servicing, repairs, depreciation, and the salaries of technical staff
responsible for running the facility. A large proportion of these costs are fixed, meaning
they remain constant regardless of fluctuations in production levels. This creates both
a challenge and an opportunity for ABW: while fixed costs increase financial risk during
periods of low demand, they also encourage the organization to maximize capacity
utilization in order to spread these costs over a higher volume of output, thereby
reducing unit production costs. Furthermore, capacity costs are strategic in nature, as
they influence ABW’s long-term competitiveness. A well-planned investment in
capacity ensures that the company can respond effectively to rising demand, reduce
lead times, and maintain consistent quality standards. Conversely, underinvestment
may lead to production bottlenecks, lost sales opportunities, and a weakened market
position. Therefore, the management of capacity costs requires a balance between
Educating the world for a better change
, Elite Academic Institute 068 053 513 262 1185
financial prudence and strategic foresight, ensuring that resources are allocated
efficiently while aligning with the firm’s growth objectives.
The Opportunity Cost of Not Having Adequate Capacity
This cost represents an opportunity cost in the form of lost sales and diminished
market share (Helo & Hao, 2022). If ABW produces too few cars, the company risks
losing customers as prices may exceed their budgets, resulting in reduced sales.
Furthermore, operating with insufficient capacity can constrain profit margins and
expose the firm to competitive disadvantages when it is unable to meet customer
demand. In such cases, ABW would not only lose customers to rival producers but
also forfeit potential profits due to its inability to keep pace with demand for the 5-
Series.
The Economic Trade-Off
In capacity long-term planning, an organisation like ABW must achieve a delicate
balance between these two opposing costs. Too much capacity, especially when
demand drops, is disastrous due to the waste of resources and the expensive fixed
costs. This would cause inventory accumulation and waste if ABW produces too many
vehicles. Too little capacity, however, means that the organisation will not be able to
meet demand, resulting in the loss of sales and market share to its rivals.
ABW's implementation of an ERP system to align its supply chain and balance supply
to demand demonstrates their effort to operate the production line at a speed that will
be capable of keeping pace with the demands' patterns without sacrificing quality. It is
their strategic effort to survive the trade-off by producing sufficient to meet demand
without having excessive waste from excess inventory or loss in sales due to
insufficient supply. Capacity decisions, such as building a new factory, have a large
impact on business performance and are also influenced by concepts such as
economies and diseconomies of scale.
3.1.2 Can economies of scale benefit ABW at their new production facility?
Motivate your answer. (2)
Yes, economies of scale can significantly benefit ABW at their new production facility.
Economies of scale are achieved when the average unit cost of a good or service
decreases as the capacity and/or volume of throughput increases explains Kumar
Educating the world for a better change
ademic In
Ac sti
te
tu
Eli
te
he
de
W
re a
G ra eM
d u a t e s Ar
Educating the world for a better change
,Elite Academic Institute 068 053 513 262 1185
WARNING: PLEASE NOTE THAT PLAGIARISM IS A SERIOUS ACADEMIC
OFFENSE, therefore, the documents provided here including past assignments, tests
and notes are intended SOLELY for educational purposes and as a guide to help
students understand academic concepts and improve their writing skills. These
materials should not be submitted as final work, as doing so may constitute academic
dishonesty. Students are encouraged to use them as reference points, develop their
own understanding and produce original work that reflects their knowledge and critical
thinking. Students are also encouraged to regenerate their own (personalized)
solutions paying particular attention to module contents as prescribed by module
facilitators, lecturers and supervisors. If this document is plagiarized by the users and
fails, ELITE ACADEMIC INSTITUTE should not be rendered accountable since the
contents in this document only give learners a kick-start on what is expected of them
from their areas of specialty.
CAUTION: STUDENTS ARE NOT MANDATED TO USE ALL THE INFORMATION IN
THIS DOCUMENT IN WRITING THEIR ASSIGNMENTS
Educating the world for a better change
,Elite Academic Institute 068 053 513 262 1185
ENJOY!
QUESTION 3.1 CAPACITY MANAGEMENT
3.1.1 ABW have recently built a new production facility at Rosslyn, Pretoria, for
the ABW 5-Series. With reference to their new production facility, elaborate on
the economic trade-off between the cost of capacity and the opportunity cost of
not having adequate capacity. (4)
ABW's recent construction of a new production facility for the 5-Series at Rosslyn,
Pretoria, necessitates an understanding of the economic trade-off between the cost
of capacity and the opportunity cost of not having adequate capacity.
The Cost of Capacity
Capacity costs, as highlighted by Collier and Evans (2021), encompass all
expenditures associated with acquiring, operating, and maintaining the facilities and
equipment necessary to support production. For ABW, this primarily refers to the
substantial capital investment required to establish their new production facility,
including land acquisition, construction, installation of machinery, and procurement of
advanced manufacturing technology. Such investments are typically long-term in
nature and represent a significant financial commitment that directly influences the
organization’s ability to meet current and future demand. In addition to the initial outlay,
capacity costs also include the recurring annual expenses associated with the
operation and maintenance of these assets. These may cover costs such as utilities,
equipment servicing, repairs, depreciation, and the salaries of technical staff
responsible for running the facility. A large proportion of these costs are fixed, meaning
they remain constant regardless of fluctuations in production levels. This creates both
a challenge and an opportunity for ABW: while fixed costs increase financial risk during
periods of low demand, they also encourage the organization to maximize capacity
utilization in order to spread these costs over a higher volume of output, thereby
reducing unit production costs. Furthermore, capacity costs are strategic in nature, as
they influence ABW’s long-term competitiveness. A well-planned investment in
capacity ensures that the company can respond effectively to rising demand, reduce
lead times, and maintain consistent quality standards. Conversely, underinvestment
may lead to production bottlenecks, lost sales opportunities, and a weakened market
position. Therefore, the management of capacity costs requires a balance between
Educating the world for a better change
, Elite Academic Institute 068 053 513 262 1185
financial prudence and strategic foresight, ensuring that resources are allocated
efficiently while aligning with the firm’s growth objectives.
The Opportunity Cost of Not Having Adequate Capacity
This cost represents an opportunity cost in the form of lost sales and diminished
market share (Helo & Hao, 2022). If ABW produces too few cars, the company risks
losing customers as prices may exceed their budgets, resulting in reduced sales.
Furthermore, operating with insufficient capacity can constrain profit margins and
expose the firm to competitive disadvantages when it is unable to meet customer
demand. In such cases, ABW would not only lose customers to rival producers but
also forfeit potential profits due to its inability to keep pace with demand for the 5-
Series.
The Economic Trade-Off
In capacity long-term planning, an organisation like ABW must achieve a delicate
balance between these two opposing costs. Too much capacity, especially when
demand drops, is disastrous due to the waste of resources and the expensive fixed
costs. This would cause inventory accumulation and waste if ABW produces too many
vehicles. Too little capacity, however, means that the organisation will not be able to
meet demand, resulting in the loss of sales and market share to its rivals.
ABW's implementation of an ERP system to align its supply chain and balance supply
to demand demonstrates their effort to operate the production line at a speed that will
be capable of keeping pace with the demands' patterns without sacrificing quality. It is
their strategic effort to survive the trade-off by producing sufficient to meet demand
without having excessive waste from excess inventory or loss in sales due to
insufficient supply. Capacity decisions, such as building a new factory, have a large
impact on business performance and are also influenced by concepts such as
economies and diseconomies of scale.
3.1.2 Can economies of scale benefit ABW at their new production facility?
Motivate your answer. (2)
Yes, economies of scale can significantly benefit ABW at their new production facility.
Economies of scale are achieved when the average unit cost of a good or service
decreases as the capacity and/or volume of throughput increases explains Kumar
Educating the world for a better change
