Discuss what issues would be involved in a capacity expansion, in particular the
ID: 368401 • Letter: D
Question
Discuss what issues would be involved in a capacity expansion, in particular the timing and size of the expansion. What would be the advantages and disadvantages of an expansionist vs.wait-and-see strategy? Which one would you recommend? For the capacity expansion decision above, describe how you would use cash flow analysis to assess the financial impact of the decision. What are the uncertainties involved in the expansion decision? Describe how you would use decision tree analysis to assist with the decision.Explanation / Answer
It is very crucial to recognize the fact that strategic capacity planning is very significant for products and services as it facilitates organization to accomplish the overall business objective by helping to stretch at an optimum level where production competencies can encounter demand.
Capacity requirement generally comprises of tools and utensils, space and worker capabilities. If production competencies are not able to encounter demand then organizations can suffer with elevated expenditures, stress on assets and consumer loss.
Capacity decisions within an organization are very important as it facilitates to govern and regulate optimum utilization of resources enabling maximum output and helps to provide with an insight relating to decisions which are correlated with operational expenditures.
The foremost advantage of business expansion is the capability to appeal and preserve fresh consumers. When you develop new products or move into new markets it helps you to tap new consumers which were previously untapped in consumer markets.
Business expansion helps you to spread the jeopardies and threats of doing business and lessen the prospective of one product or one unfortunate judgement injuring your business. Functioning in numerous markets or in diverse product regions also facilitates organization to extend the expenditures of doing business across more markets or consumers.
Disadvantage of business expansion is that when an organization finances its resources to expand then as a consequence it will have less fund accessible for other business dealings. Thus it’s very crucial to cautiously think through the market prospective of expansion before implementing and executing the investment decisions.
On one side wait and see tactic appears to make logic as we all are dealing with an uncertain economy with rapid technological growth and development with foremost alterations taking place at numerous different levels thus waiting and seeing what materializes undoubtedly appears to be less risky.
On other side wait and see approach can sometimes be much more risky if business fails to take any kind of decisive actions because with rapid changes and massive transformation taking place competitors can easily develop and deploy new offerings quickly and thus quickly establish its market position and redefine its business position completely.
Incremental cash flow analysis can be put to use to study the alteration in cash inflows and outflows that are precisely accredited to an administrative judgement. For instance if an organization is thinking about modifying the quantity of production capacity of a machine the conclusion should be made based on the incremental cash outflows needed to modify the capacity of the equipment and also the incremental cash inflows resulting from that decision.
A decision tree of any dimension will always comprise of action choices with diverse conceivable proceedings or consequences of action which are to some extent affected by coincidental or other irrepressible state of affairs.
For instance if you are thinking to decide whether to commend an expansion budget for a value-added product. You can do so on the ground that the expansion if fruitful can give you an economical advantage but if you fail in your expansion plans of the product then your competitor can completely destroy your market share.
In the decision tree you place out only those conclusions and proceedings or consequences that are significant to you and have significances you aspire to equate. A decision tree does not give administrators the solution to a financial choice but however it facilitates administrators to conclude which substitute at any specific choice point will produce the utmost predictable economic advantage given the material facts and substitutes are relevant to the decision.
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