Refer to lines 29–31. Calculate the forecast capacity utilisation for 2020 in FE's factory.

Mark scheme

Marking points from the official mark scheme (Feb/Mar 2020). The mark or mark type is shown in brackets.

1. [1] CU = (Current output / Capacity) x100
2. [1] Or Forecast output / capacity x100
3. [2] CU = 425 / 450 x100 = 94.4%
4. [1] 94.4
5. [1] Unit cost if factory extension 0.02 + 0.33 = ($)0.35 (m)
6. [1] Unit cost if outsourcing 0.37 + 0.01 = ($)0.38 (m)
7. [1] Difference = $0.03 m or $30 000
8. [2] 0.03 or 30 000
9. [2] Possible answers with working (Deduct further mark if no $ or m) $0.02 m
10. [2] $0.05 m
11. [1] $0.04 m
12. [K] Definition of outsourcing: when a business contracts out activity to a third party
13. [K] Key factors in decision: reliability of outsourcing company, impact on quality, relative cost, time period
14. [APP] Capacity utilisation is already 94.4% so hard to increase production further
15. [APP] Cost of outsourcing is $38 000 per unit.
16. [APP] Outsourcing is more expensive per unit by $30 000
17. [APP] Need for borrowing $150m for factory expansion
18. [APP] Expansion increases capacity by 75 more wind turbines relative to outsourcing (675 compared to 600)
19. [APP] FE's focus on quality and 100% in-house production
20. [APP] Use of difference in timescale - 12 months v 4 months to increase production
21. [AN] Any reduction in quality from outsourcing could damage FE's reputation and result in lower sales or impact ability to charge higher prices
22. [AN] Extension of the factory may cause a reduction in production in 2020 and impact sales to existing customers.
23. [AN] Factory extension will take 12 months therefore may result in being unable to meet 7% increase in demand so loss of sales will result
24. [AN] Outsourcing is more flexible so if demand doesn't continue to increase FE can vary contract according to level of demand maintaining a competitive cost per unit
25. [AN] Factory extension will increase gearing, increasing costs due to forecast rise in interest rates
26. [AN] Outsourcing is more expensive which will increase price or reduce profit margins
27. [EVAL] A supported recommendation should follow consideration of pros and cons of outsourcing
28. [EVAL] Is FE certain that the costings are accurate?
29. [EVAL] Long run v short run consideration. Initially after building extension FE will be operating below capacity thus additional fixed costs will be spread over a lower number of towers. This will increase the cost of in house production above that of outsourcing and thus reduce profit.
30. [EVAL] How long will it take to increase sales to use the capacity of the extended factory?
31. [EVAL] Will the extension disrupt production of wind turbines to meet existing customer orders?
32. [EVAL] Factory extension increases fixed costs significantly due to borrowing and if demand doesn't increase there will be spare capacity resulting in an increase in unit cost
33. [EVAL] How long will it take to negotiate contract with CT?