Difficulty: Easy

Average Score: 75%

Which scenario is evidence of a capacity cushion?

Rationale

A frozen-yogurt output changes with the seasons.

Seasonal changes in frozen-yogurt output indicate a capacity cushion, as the firm is adjusting production to meet fluctuating demand rather than operating at maximum capacity. This flexibility allows the business to manage varying consumer interest effectively, ensuring resources are available when needed without overextending operations.

A (A footwear plant runs at 92 % of rated capacity.) YOUR ANSWER

Running at 92% of rated capacity suggests that the plant is close to its maximum output. This scenario indicates limited flexibility to accommodate unexpected increases in demand, which does not exemplify a capacity cushion but rather a potential risk of overcapacity.

B (A frozen-yogurt output changes with the seasons.) CORRECT

This choice accurately demonstrates a capacity cushion, as the ability to adjust production levels according to seasonal demand fluctuations reflects the firm's strategic management of capacity. By scaling output based on consumer trends, the company ensures it can meet demand peaks without exceeding its operational limits.

C (A food processor has been maxed out for months.) YOUR ANSWER

Being maxed out for months signifies that the food processor is consistently operating at full capacity with no room for additional production. This indicates a lack of a capacity cushion, as the firm cannot respond to any sudden increase in demand or unexpected disruptions in production.

D (A lumber firm plans output based on detailed forecasts.) YOUR ANSWER

While planning output based on forecasts shows a level of strategic thinking, it does not inherently indicate a capacity cushion. The firm may still operate near its maximum capacity based on those forecasts, leaving little room for unexpected demand changes or operational challenges.

Conclusion

A capacity cushion is characterized by the flexibility to adjust production levels in response to fluctuating demand. The ability of the frozen-yogurt output to change seasonally illustrates this concept effectively, showcasing how businesses can manage resources to meet consumer needs without being constrained by maximum capacity limits. Other scenarios indicate either operational strain or planned efficiency without the necessary flexibility that defines a true capacity cushion.

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