In 1995, was about 10% excess capacity (on average) in the operating expense bas
ID: 341294 • Letter: I
Question
In 1995, was about 10% excess capacity (on average) in the operating expense base. Capacity grew at a compound rate of about 26% from 1995 to 1999, versus households growth at about 21%. As a result, excess capacity in 1999 was a much larger percentage of the expense base, across branches, the call center, on-line activity, transactions processing and account maintenance activity. There are currently 3,880,000 customers, and cost for current customers is 1,381,300,000 which includes excess capacity.
The question is: Noting that excess capacity is charged back to active accounts, if AIMS scaled back to 3,000,000 active households and planned only a 10% excess capacity reserve for future growth, a large proportion of cost could be eliminated. Estimate how much of total cost for 1999 could be eliminated.
Explanation / Answer
Answer : if we take base 100 in 1995
than in 1995 capacity was 110
add -26 % from
1995 to 1999 28.60
Total capacity 138.60
in 1995 customer say 100
growth 21 % 21
Total 121
Excess capacity in 1999 is 138.60/121*100 = 14.54 %
We can curtail up to 10 %
Means revise capacity is 121*110% i.e 133.10 instead of 138.60
Total expenses for 138.60 in 1999 is 1381300000 these can be saved by
1381300000 divied by 138.60 and multiply by 133.10 = 1326486507
Saving is 54813493 ( 1381300000-1326486507)
In case if we compare from customer = per customer is 1381300000/3880000 = 356
new cusomer base is 3000000*356 is 1068000000
saving is 1381300000-1068000000 is 313300000
But saving will be only 54813493 as we have to maintain excess capacity.
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