Production, Productivity and Capacity

A firm currently makes each customer's kitchen to a unique, one-off design — job production. It switches to producing kitchens in batches of 40 identical units before changing the design. What happens to its average setup cost per unit?

• ARises, because batches require more complex machinery to set up than a single one-off job

  The complexity of a single changeover isn't what changes here — it's how many units that one changeover gets divided across. Batching doesn't require more complex machinery just because more units follow from it.

• BStays the same, because the total setup cost of each changeover hasn't changed

  Total setup cost per changeover staying the same is exactly why the cost PER UNIT falls — the same total is now divided by 40 units instead of 1, not left unchanged per unit.

• Falls, because the same one-off setup cost is now spread across 40 identical units instead of just one

  Correct. Setup cost per unit = S ÷ n; moving from n = 1 (job) to n = 40 (batch) divides the same S by a much larger number.

• DCannot be determined without knowing the wage rate

  The wage rate is a variable-cost input, not part of the one-off setup cost being amortised across the batch — it doesn't determine the direction of this specific change.

Traps tested: Assumes batch complexity raises setup · Ignores batch size in denominator · Overclaims uncertainty

A call centre's maximum possible output is 10,000 handled calls a month. Last month it handled 8,500 calls. What was its capacity utilisation?

• A15.0%

  This is the spare capacity (1,500 ÷ 10,000), the GAP between current and maximum output — not the capacity utilisation itself, which is what the question asks for.

• 85.0%

  Correct. 8,500 ÷ 10,000 × 100 = 85%.

• C117.6%

  This inverts the ratio (10,000 ÷ 8,500 instead of 8,500 ÷ 10,000). Capacity utilisation is current output over maximum, not maximum over current.

• D8.5%

  This treats the maximum possible output as 100,000, not 10,000 — a misplaced decimal point in reading the given figure.

Traps tested: Computed spare capacity not utilisation · Inverted ratio · Decimal place error

A firm currently produces at an output below the level where its average cost is minimised. In the sense the WBS12 spec uses the word, what does moving output up toward that minimum-AC level do to the firm's efficiency?

• ANothing changes — "efficiency" on this paper only concerns labour productivity, not cost

  Efficiency and productivity are related but not the same term here — the spec explicitly defines efficiency as producing at minimum average cost, a cost-based idea, not simply output per worker.

• BIt falls, because producing more output always raises total cost

  Total cost does rise with output — but efficiency here concerns average cost, not total cost, and moving toward the minimum-AC point is exactly what lowers average cost, even while total cost rises.

• CIt falls, because moving toward the minimum spreads a smaller fixed cost across fewer units

  This reverses the mechanism: moving output UP toward the minimum-AC point spreads the SAME fixed cost across MORE units, which is exactly what lowers average fixed cost — not fewer units, and not a smaller fixed cost.

• It rises, because moving toward the output where average cost is lowest is, by the spec's own definition, what "more efficient" means here

  Correct. The spec defines efficiency specifically as producing at the output where average cost is minimised — moving output toward that point is, by definition, an increase in efficiency in this sense.

Traps tested: Conflates efficiency with productivity only · Confuses total cost with average cost · Garbles afc direction

Which of the following firms is most likely to choose capital-intensive over labour-intensive production?

• A car manufacturer producing 200,000 identical units a year of a single model

  Correct — capital-intensive production needs a high, stable volume of identical output to justify the upfront cost of specialised machinery, which is exactly what 200,000 identical units a year provides; this is the flow end of the spectrum derived above.

• BA tailor making made-to-measure wedding suits for individual clients

  Made-to-measure, one-off suits are closer to job production — every commission is different, so there's no repeated, standardised volume to spread the cost of specialised machinery across, which is why bespoke tailoring stays labour-intensive.

• CA small bakery making a different custom-decorated cake for every order

  A different custom cake for every order is job production in miniature — low volume, high variety — the opposite of the standardised, high-volume conditions that make capital-intensive investment pay off.

• DA furniture workshop building unique, commissioned pieces to each client's specification

  Unique, commissioned furniture is bespoke, low-volume, one-off work — job production's defining conditions, and the reason skilled labour rather than dedicated machinery does most of the work.

Traps tested: Ignores volume standardisation link

A furniture company currently uses batch production, with fixed costs of £20,000 a month and a variable cost of £8 per unit. It is considering switching to flow production, which would raise fixed costs to £60,000 a month (financing a dedicated automated line) but cut variable cost to £3 per unit. The company currently produces 6,000 units a month and forecasts demand will rise to 10,000 units a month within two years. (VERIDIAN-original stimulus and figures, written in the style of a WBS12 Calculate/Explain question — not a reproduction of any real Pearson question or data.)

Using the figures given, explain what should happen to the company's choice of production method as its output grows from 6,000 to 10,000 units a month.

• AThe company should switch to flow production only once it reaches 10,000 units, because that is the volume mentioned in the forecast

  10,000 is the forecast figure given, but it isn't the actual crossover output — using the forecast number rather than deriving where the two total-cost lines actually meet (8,000 units) gets the right general direction but the wrong specific threshold.

• BThere is not enough information to compare the two methods without knowing the selling price per unit

  Selling price would matter for comparing revenue or profit — but this question asks only for a COST comparison between the two production methods, which the fixed- and variable-cost figures given are entirely sufficient to answer.

• CThe company should switch to flow production immediately, because flow's £3 variable cost is always lower than batch's £8

  This is an unconditional conclusion that only looks at variable cost and ignores flow's much larger £60,000 fixed cost — at the company's current 6,000-unit output, batch (£68,000) is actually cheaper than flow (£78,000) once both cost components are included.

• The company should stay on batch production at 6,000 units a month, because batch's total cost (£68,000) is currently lower than flow's (£78,000) — but should switch once output passes roughly 8,000 units a month, the point where the two methods' total costs become equal and flow becomes cheaper beyond it

  Correct. Solving 20,000 + 8Q = 60,000 + 3Q gives Q = 8,000, the exact output at which the two methods cost the same (£84,000 each); below it batch is cheaper, above it flow is cheaper — which is what the company's actual 6,000-to-10,000 growth path passes through.

Traps tested: Uses forecast figure not actual crossover · Overclaims uncertainty · Ignores fixed cost tradeoff

A furniture workshop has a maximum possible output of 4,000 units a year. Demand has fallen sharply and looks set to stay low for the foreseeable future — the workshop only produced 2,000 units last year, 50% capacity utilisation. (VERIDIAN-original stimulus and figures — not a reproduction of any real Pearson question or data.)

Given that the fall in demand looks permanent rather than temporary, which is the most appropriate way for the workshop to improve its capacity utilisation?

• Sell or lease out some of its surplus machinery and floor space, so the maximum possible output falls closer to the 2,000 units it can actually sell

  Correct. When the shortfall is permanent, raising current output toward an unchanged maximum only works if demand actually recovers — it won't here. The other lever is to shrink the maximum itself: reducing capacity narrows the same gap from the other end, and it's the appropriate fix specifically because the fall in demand is stated as permanent, not temporary.

• BLaunch a short, one-off discount promotion to temporarily push output back up toward 4,000 units

  A one-off promotion raises current output only briefly, and the stimulus says the fall in demand looks permanent — a temporary sales push doesn't fix a structural problem, and once the promotion ends capacity utilisation would fall straight back down.

• CDo nothing, because capacity utilisation only measures performance and has no actual effect on the firm's costs

  The mechanism lesson derives exactly why this is wrong: below 100% utilisation, the same fixed cost is spread across fewer units, raising average cost — capacity utilisation is not a neutral scorecard, it's the current position on a U-shaped average-cost curve.

• DIncrease the maximum possible output further, by investing in additional machinery, so there is more capacity to grow into

  This moves in exactly the wrong direction — raising the maximum when output is already below the existing maximum widens the gap between current and maximum output rather than narrowing it, which would lower capacity utilisation further, not improve it.

Traps tested: Temporary fix for permanent problem · Treats capacity utilisation as inert metric · Raises capacity when utilisation is already low