Abstract: A FIELD STUDY ON INCREASING CAPACITY UTILIZATION DURING ECONOMIC RECESSIONS
ABSTRACT
Many job shops are especially vulnerable to debilitating losses during economic recessions due to their use of high-tech operations, dependence on a few large manufacturing customers and reliance on price-bidding practices to generate most of their revenues. The few management accounting pricing methods in the literature often suggested to help these companies improve their capacity utilization are ineffective and some of them may even worsen these problems. This paper derives a more effective pricing method, the break-even-full-capacity-utilization (BEFCU) model, to handle these problems. The BEFCU model, which seeks full capacity utilization, has three characteristics: (a) differentiating committed from discretionary fixed cost, (b) developing an annualized capacity utilization level, and (c) using a functional cost hierarchy stemming from the associative costing approach. Accordingly, under the BEFCU model, job shop management has an instrumental pricing continuum extending from the minimum acceptable (BEFCU) sale price to the regular sale price.
To demonstrate the practicality of the BEFCU model, the authors apply this model to an actual job shop. This model works better with certain strategies based on built-in flexibility in commitments with suppliers and customers and maintaining a mode of conservatism in accounting for plant assets. The model has a few limitations that can render any pricing methodology ineffective during economic recessions.
Key words: Pricing, capacity utilization, idle capacity, job shops, cost-plus pricing, contribution margin pricing, revenue management, investment-based pricing, segmented income statement,
