Rationalise product range to focus on high-margin lines
Consider short-time working or temporary redundancy
Haribo example: batch downtime must be minimised
70–88% — optimal zone
Unit costs are near their lowest — good pricing power
Buffer capacity allows response to demand surges
Quality is not yet at risk from overworking machinery
Dyson target zone for Malaysian production
Land Rover aims here across its full model range
Over 90% — risk zone
Quality defect rates begin to rise (Cadbury data shows this)
Delivery delays emerge — machinery gets no maintenance time
Workers face fatigue — motivation and quality fall
No capacity to absorb unexpected demand spikes
Solution: invest in additional capacity or outsource overflow
Worked exam question — Land Rover
Calculate & Analyse — 6 marks
Land Rover's Solihull plant has a maximum weekly capacity of 4,200 vehicles. Due to a semiconductor shortage, output fell to 3,150 vehicles last week. Calculate capacity utilisation and analyse one consequence of operating at this level for Land Rover.
Step 1 — Calculate (2 marks)
Capacity utilisation = 3,150 ÷ 4,200 × 100 = 75% Always: write formula → substitute → state answer with % sign. Do not skip steps.
Step 2 — Identify a consequence (1 mark)
Land Rover's unit cost of production rises. Fixed costs — including factory lease, machinery depreciation, and management salaries — remain constant whether 3,150 or 4,200 vehicles are produced. At 75% utilisation, those fixed costs are spread across fewer units.
Step 3 — Explain the mechanism (2 marks)
If Land Rover's weekly fixed costs are £42m, at 4,200 units the fixed cost per vehicle is £10,000. At 3,150 units, it rises to £13,333 per vehicle — a £3,333 increase. This erodes the profit margin on each vehicle sold, potentially reducing the weekly contribution to profit by several million pounds.
Step 4 — Apply to context (1 mark)
For Land Rover, whose vehicles carry premium price tags (£40k–£120k+), a temporary rise in unit cost may be absorbed. However, a prolonged semiconductor shortage could force Land Rover to either reduce profitability or pass costs to consumers — damaging its competitive position against Mercedes and BMW, who face the same pressures.
Evaluate — 20 marks
Cadbury's Bournville production line is operating at 96% capacity utilisation. Evaluate whether Cadbury should invest in additional production capacity to reduce this figure.
KAA For investment
96% is above the optimal threshold of ~85–90%. Quality defect rates are measurably higher at this level — for a confectionery brand, even small quality variations (misshapen bars, inconsistent weight) risk customer dissatisfaction and potential retailer complaints. Additional capacity reduces pressure on existing machinery, allowing proper maintenance schedules and quality checks.
KAA For investment
Extra capacity creates flexibility to respond to seasonal demand surges (Christmas, Valentine's, Easter) without risking quality. It also provides resilience if existing machinery breaks down — at 96%, any downtime immediately creates a shortfall that cannot be absorbed.
Evaluation Against investment
Capital investment in production line expansion is extremely expensive and largely irreversible. If consumer demand for Cadbury Dairy Milk declines — driven by health trends, competitor launches, or a cost-of-living squeeze on discretionary spending — the new capacity would sit idle, dramatically increasing fixed costs and worsening financial performance.
Conclusion
Whether Cadbury should invest depends on whether 96% utilisation is permanent or temporary. If driven by long-run growth in emerging markets (e.g. India, where Cadbury has strong brand recognition), investment is clearly justified. If temporary (post-pandemic demand spike), managing the existing line carefully — strict maintenance schedules, accepting some overtime costs — may be preferable to irreversible capital commitment.