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9609 · 4.1.3

Capital intensive and labour intensive operations — practice questions

Practice and worked examples for 9609 Capital intensive and labour intensive operations. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

Garment maker in Country X (low wages) considers automated cutting machines costing $2m. Currently 200 cutters employed. Discuss factors in the decision.

Show solution outline

Capital intensive pros: Faster output, consistent quality, lower unit labour cost at high volume.

Cons: $2m finance (interest, payback — 10.3), redundancy and retraining (2.1), fixed costs if fashion demand volatile.

Labour intensive pros: Flexibility for small batches (4.1.4 job production), low wages reduce automation urgency.

Decision factors: Forecast demand, labour cost trend, competitor automation, lead time requirements.

Worked example 2

A furniture maker, 'FineWoods', is considering buying a new automated wood-cutting machine for $150,000. The machine has an expected life of 5 years and annual maintenance costs of $10,000. This would replace a manual process. The company expects to produce 2,000 tables per year.

Data:

  • Manual Process (Labour-Intensive): Annual Fixed Costs = $20,000; Variable Cost per table = $200.
  • Automated Process (Capital-Intensive): Variable Cost per table = 100.100.

Analyse the costs to decide if the investment is financially viable.

Show solution outline

To determine if the investment is viable, we must compare the total annual costs of both production methods at the expected output level of 2,000 units.

Step 1: Calculate Total Annual Cost for the Labour-Intensive Method This method has lower fixed costs but higher variable costs per unit.

  • Formula: Total Cost = (Variable Cost per Unit × Quantity) + Fixed Costs
  • Calculation: Total Cost = (200×2,000)+200 \times 2,000) + 20,000
  • Total Cost = 400,000+400,000 + 20,000 = **420,000∗∗420,000**

Step 2: Calculate Total Annual Cost for the Capital-Intensive Method This method involves a high initial investment, leading to higher fixed costs, but reduces the variable cost per unit.

  • Annual Fixed Costs:
    • Depreciation: $150,000 / 5 years = $30,000
    • Maintenance: 10,00010,000
    • Existing Rent: 20,00020,000
    • Total Fixed Costs: 30,000+30,000 + 10,000 + 20,000=20,000 = 60,000
  • Variable Cost per Unit: 100100
  • Formula: Total Cost = (Variable Cost per Unit × Quantity) + Fixed Costs
  • Calculation: Total Cost = (100×2,000)+100 \times 2,000) + 60,000
  • Total Cost = 200,000+200,000 + 60,000 = **260,000∗∗260,000**

Step 3: Compare and Conclude

  • Labour-Intensive Total Annual Cost: 420,000420,000
  • Capital-Intensive Total Annual Cost: 260,000260,000

Conclusion: By investing in the automated machine, FineWoods could reduce its total annual production costs by 160,000(160,000 (420,000 - $260,000) at an output of 2,000 units. From a purely cost-based perspective, the investment is highly recommended.

Further Analysis (Break-Even Point): We can find the output level where both methods cost the same: (200×Q)+200 \times Q) + 20,000 = (100×Q)+100 \times Q) + 60,000 100Q=100Q = 40,000 Q = 400 units. This means the investment is more cost-effective for any output level above 400 units per year.

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