Question 1.
Operational failures form an inevitable component of all entity activities and their gravity varies from small inconveniences to huge disasters in the organizations. They are those flaws that exist in operation systems such that their prior correction would serve as prevention or a significant mitigation for the consequential outcomes. The effects of operational failures can also be financial or nonfinancial. The operational failures include the following:
Binomial: When this type of failure occurs, the whole operation works or it doesn’t work completely. It’s impossible to notice these kinds of failures until they surface themselves. They can however be anticipated and mitigated by regular system maintenances or replacement of old or worn out parts of the system. A good example of a binomial failure is the wearing out of a machine motor or the blowing of a bulb.
Multinomial: This kind of failure occurs where the operating system is made up of multiple elements/ parts which contribute to the optimal functionality of the system. Any part can fail and go unnoticed, and the other parts remain functional. The system may also remain functional. The complete collapse of the whole system may require the failure of various parts. An example is the case of a water pump or a vehicle. These may operate on a faulty radiator.
Continuous: The manifestation of this failure is the deterioration or diminished functionality of the whole system. These failures may be anticipated and prevented by regular system maintenance and replacement to keep the system in order. An example is the case of a rechargeable car battery.
Catastrophic failures: These are usually unforeseeable occurrences that impact the whole entity. They may or may not be preventable. Such occurrences include acts of God such as earthquakes.
(Weeden, 2015.)
Question 2.
Operational leverage looks at the extent to which a business effectively and efficiently utilizes its fixed assets and the corresponding fixed costs. The model of operational leverage is initiated by the determination of the total amount of fixed assets (plant and equipment) intended to be applied to use in the business. This is informed by other factors such as the need to install hi-tech equipment to save on labor costs. The main objective of this step is to set up a business with low costs and high returns. The business owner therefore decides the sources of business financing. This can either be debt financing or owners equity funding. Whichever choice the investor makes, if the business is successful, profits will substantially increase. The contrary will imply losses and eventual bankruptcy. (Holmes, 2002)
References
Weeden, M. (2015) Failure mode and effects analysis (FMEAs)for small business owners and
non-engineers.
Crouhy, M., Galai, D., & Mark, R. (2000). Risk management. New York: McGraw Hill.
Holmes, A. (2002). Risk management. Oxford, U.K.: Capstone Pub.
