Question

In 1995, was about 10% excess capacity (on average) in the operating expense base. Capacity grew at a compound rate of about 26% from 1995 to 1999, versus households growth at about 21%. As a result, excess capacity in 1999 was a much larger percentage of the expense base, across branches, the call center, on-line activity, transactions processing and account maintenance activity. There are currently 3,880,000 customers, and cost for current customers is 1,381,300,000 which includes excess capacity.

The question is: Noting that excess capacity is charged back to active accounts, if AIMS scaled back to 3,000,000 active households and planned only a 10% excess capacity reserve for future growth, a large proportion of cost could be eliminated. Estimate how much of total cost for 1999 could be eliminated.

Answer 1

Answer : if we take base 100 in 1995

than in 1995 capacity was   110

add -26 % from

1995 to 1999                   28.60

Total capacity                 138.60

in 1995       customer          say      100

growth 21 %                                   21

Total                                            121

Excess capacity in 1999 is 138.60/121*100 = 14.54 %

We can curtail up to           10 %

Means revise capacity is 121*110% i.e     133.10 instead of 138.60

Total expenses for 138.60 in 1999 is 1381300000 these can be saved by

1381300000 divied by 138.60 and multiply by 133.10 = 1326486507

Saving is 54813493   ( 1381300000-1326486507)

In case if we compare from customer = per customer is 1381300000/3880000 = 356

new cusomer base is 3000000*356 is 1068000000

saving is 1381300000-1068000000 is 313300000

But saving will be only 54813493 as we have to maintain excess capacity.