Question

The rubber company use Matching Order, which is that we start by considering the price and quantity of materials that we can buy each day, after which this price will be added to the cost and margin. so gross magin is stable

So key driver of profit of the firm is production capacity

Could you answer Is it ok to predict sales growth by using increase percentage of production capacity ?

For example, The firm has production capacity 290,000 on 2019 and has production capacity 400,000 on 2020

make it as percent (400,000 - 290,000)/290,000 *100 = 38%

Can I use this number to a sales growth

Answer 1

While production capacity should be considered when estimating sales growth, growth in production capacity should not be used as a number for sales growth, due to the following reasons -

• Sales growth cannot exceed production capicity, hence this should be considered
• However, as supply increases, demand will reduce hence sales growth will not be at the same pace as production capacity growth. Hence, it must be ensured that sales growth is at a lower rate than production growth.