what is this means?

Question

Essentially, the expenses incurred in stopping production are the costs that result when a stock-out occurs?

I understood all the single word but i am not sure whether i understood it correctly.

Is it means 'when the production line stop, it will be the cost?'
but how it can be costly?

Answer 1

When the production line stops as you say, there will be occurence of stockouts. If a loyal customer come to buy your product and see that it is not displayed or not available he can switch to a competitors product and start liking it. In the bargain you tend to loose his loyalty. This type of costs can be high which is what is meant by the sentence.

Answer 2

There are a number of costs that are incurred when the prduction line stops.

Opportunity Cost = The cost of losing out on the profits that could have been generated on those units now not being produced.

Reputational Cost = loss of sales in the future due to letting customers down in the short term

Fixed Costs = you will still incur fixed costs even if the production line halts. e.g. if staff are paid via a salary this expense is still incurre even if they are not producing units

Variable costs = this is where a saving will be made as the varibale cost of production will not be incurred e.g materials. (I think this is what you were thinking of).

Storage costs = if production halts you will be unnecessarily storing materials this is costly. JIT production systems would overcome this problem.

I hope that these give you some idea of some of the costs incurred when production stops. Think practically about what costs there are as there are many.

Answer 3

NO NO NO.
It means when you run out of a certain manufacturing part (example: ran out of bottle caps) so you are unble to continue with the production process. You still have to (pay) incur the wages of all the peolple that are on the line waiting around with no work.