Costing of Zara Article Example | Topics and Well Written Essays - 500 words

Costing of Zara - Article Example Essentially, the main purpose of business is to generate profits. When the company is in a position to generate more revenue from its operations, that is if it is operating to capacity, it is able to expand its operations. Growth of business in this particular case entails that the company can employ more people which in turn helps to generate more revenue. This is very important in as far as sustainability in the company’s long term operations are concerned. It can also be noted that for Zara to operate below capacity, it is a strong disadvantage to its financial performance. Such companies invest large sums of money to set up manufacturing plants and they must operate above capacity to recover the money that has been invested in the first place. When the company has recovered the money that has been invested, it is in a position to generate surplus revenue commonly known as profit. Any viable company should be in a position to generate profits from its operations. This can help the company to operate viably in the long run. The other disadvantage of operating below capacity is that the company may face problems in terms of meeting the maintenance costs of the equipment used in the manufacturing of fashionable clothes. A company that is operating below capacity is not able to meet all its operational costs as a result of the fact that it would be generating limited revenue. This means that the company may be forced to borrow from other financial institutions in order to sustain its operations in the event that the equipment has broken down. The company should be in a position to buy spares and meet other operational costs in the event that it has encountered some problems in its operations. This can only be possible if it is operating above capacity. To a certain extent, the only advantage that can be derived by Zara for operating below capacity is that it is in a