Introduction to operations management practice questions.

Define operations management as understood in Business Management.

• The process of promoting and selling a firm's products to its target market
• The function that transforms inputs into outputs (goods and services)
• The recruitment, training and motivation of a firm's workforce
• The management of a firm's cash flow, profit and sources of finance

Answer: The function that transforms inputs into outputs (goods and services)

Operations management is the process by which resources (inputs) are converted into finished goods and services (outputs), sometimes called the transformation process.

A firm has a low capacity utilisation of 55%. Suggest which action would most directly raise this figure.

• Increasing the maximum productive capacity by buying more machinery
• Boosting sales so that actual output rises toward maximum capacity
• Reducing the selling price of raw materials purchased
• Increasing the number of quality inspectors employed

Answer: Boosting sales so that actual output rises toward maximum capacity

Capacity utilisation rises when actual output moves closer to maximum capacity; increasing sales/demand raises actual output while capacity stays the same.

Distinguish between goods and services by selecting the statement that best describes a service.

• It is tangible and can be stored as inventory for later sale
• It is intangible, produced and consumed together, and cannot be stored
• It always has a higher profit margin than a physical product
• It never requires any physical inputs or resources to produce

Answer: It is intangible, produced and consumed together, and cannot be stored

Services are intangible, typically perishable (produced and consumed simultaneously) and cannot be held as stock, unlike tangible goods.

Explain the effect on unit costs when a business increases its capacity utilisation, assuming fixed costs stay the same.

• Unit costs rise because total fixed costs increase with output
• Unit costs fall because fixed costs are spread over more units of output
• Unit costs stay exactly the same regardless of output
• Unit costs fall because the total fixed costs themselves fall

Answer: Unit costs fall because fixed costs are spread over more units of output

Higher output spreads the same total fixed cost over more units, lowering the fixed cost per unit and therefore the average (unit) cost.

A business links its marketing and operations functions. Determine the operations consequence if a marketing campaign succeeds far beyond forecasts.

• Capacity utilisation falls sharply because output is unaffected
• The firm may exceed its capacity, causing stock-outs or delays
• Fixed costs per unit automatically rise as demand grows
• The transformation process stops adding value to inputs

Answer: The firm may exceed its capacity, causing stock-outs or delays

If demand from marketing outstrips capacity, the operations function cannot supply enough output, leading to stock-outs, delays or lost sales — showing functions are interdependent.

State which of the following is a limitation of operating at very low capacity utilisation.

• Fixed costs are spread over fewer units, raising the cost per unit
• The business cannot cope with any additional orders it receives
• Machinery and staff are permanently overworked with no rest
• Quality inevitably falls because production is too fast

Answer: Fixed costs are spread over fewer units, raising the cost per unit

Low utilisation means the same total fixed costs are shared over few units, so fixed cost per unit — and average cost — is high, hurting competitiveness.