A Numerical Example Illustrating Cost of Idle Capacity in Manufacturing
Author(s)
Gerald Aranoff
ABSTRACT
We present an elaborate numerical example of a competitive manufacturing industry in the United States facing demand fluctuations to illustrate cost of idle capacity in manufacturing. We show that given demand fluctuations, such as the business cycle, significant cost of idle capacity is not only ordinary and necessary but desirable! We recommend manufacturing firms in the United States increase outsourcing major parts and components to increase output-rates flexibility. Outsourcing is rising in recent years with advances in internet, computers, and telephone. Manufacturers today can depend on getting needed parts “just-in-time” from outside suppliers without maintaining inventories of parts or capacity to produce parts.
We present an elaborate numerical example of a competitive manufacturing industry in the United States facing demand fluctuations to illustrate cost of idle capacity in manufacturing. We show that given demand fluctuations, such as the business cycle, significant cost of idle capacity is not only ordinary and necessary but desirable! We recommend manufacturing firms in the United States increase outsourcing major parts and components to increase output-rates flexibility. Outsourcing is rising in recent years with advances in internet, computers, and telephone. Manufacturers today can depend on getting needed parts “just-in-time” from outside suppliers without maintaining inventories of parts or capacity to produce parts.
Cite this paper
Aranoff, G. (2014) A Numerical Example Illustrating Cost of Idle Capacity in Manufacturing. Theoretical Economics Letters, 4, 829-833. doi: 10.4236/tel.2014.49105.
Aranoff, G. (2014) A Numerical Example Illustrating Cost of Idle Capacity in Manufacturing. Theoretical Economics Letters, 4, 829-833. doi: 10.4236/tel.2014.49105.
References
[1] Clark, J.M. (1923) Studies in the Economics of Overhead Costs. The University of Chicago Press, Chicago. [2] Aranoff, G. (2011) Idle-Capacity Costs in ABC Absorption and Direct-Costing Income Statements. Cost Management, 25(2), 6-10. [3] Baxendale, S.J. and Foster, B.P. (2010) ABC Absorption and Direct Costing Income Statement. Cost Management, 24(5), 5-14. [4] Aranoff, G. (2011) John M. Clark’s Calculation of Cost of Idle Capacity. Cost Management, 25(3), 25-32. [5] Herath, H.B. and Kusy, M.I. (2014) Activity-Based Costing: Potential Research Issues on the Choice of Cost Management Systems. Cost Management, 28(5), 5-22. [6] Aranoff, G. (1991) John M. Clark’s Concept of Too Strong Competition and a Possible Case: The US Cement Industry. Eastern Economic Journal, 17(1), 45-60. [7] Aranoff, G. (2011) Competitive Manufacturing with Fluctuating Demand and Diverse Technology: Mathematical Proofs and Illuminations on Industry Output-Flexibility. Economic Modelling, 28, 1441-1450. http://dx.doi.org/10.1016/j.econmod.2011.02.016 [8] Clark, J.M. (1961) Competition as a Dynamic Process. The Brookings Institution, Washington DC.
[1] Clark, J.M. (1923) Studies in the Economics of Overhead Costs. The University of Chicago Press, Chicago. [2] Aranoff, G. (2011) Idle-Capacity Costs in ABC Absorption and Direct-Costing Income Statements. Cost Management, 25(2), 6-10. [3] Baxendale, S.J. and Foster, B.P. (2010) ABC Absorption and Direct Costing Income Statement. Cost Management, 24(5), 5-14. [4] Aranoff, G. (2011) John M. Clark’s Calculation of Cost of Idle Capacity. Cost Management, 25(3), 25-32. [5] Herath, H.B. and Kusy, M.I. (2014) Activity-Based Costing: Potential Research Issues on the Choice of Cost Management Systems. Cost Management, 28(5), 5-22. [6] Aranoff, G. (1991) John M. Clark’s Concept of Too Strong Competition and a Possible Case: The US Cement Industry. Eastern Economic Journal, 17(1), 45-60. [7] Aranoff, G. (2011) Competitive Manufacturing with Fluctuating Demand and Diverse Technology: Mathematical Proofs and Illuminations on Industry Output-Flexibility. Economic Modelling, 28, 1441-1450. http://dx.doi.org/10.1016/j.econmod.2011.02.016 [8] Clark, J.M. (1961) Competition as a Dynamic Process. The Brookings Institution, Washington DC.