2.3.2 Capacity Utilisation

Question 1

capacity utilisation

Answer 1

• Capital utilisation measures the extent to which the plant is utilising its potential capacity
• Measures what proportion of the theoretical maximum output is actually produced

Capital utilisation = (actual output / potential output) x 100

Question 2

benefits on CU

Answer 2

• Firms with higher capacity utilisation are able to spread their fixed costs over a larger output figure, reducing average costs and giving a significant cost advantage
• Possible if the firm is able to operate at full capacity and there is demand for its products

Question 3

what causes low CU

Answer 3

Concerning demand
- Product less fashionable
- Product seasonal
Product income elastic in a recession
- Concerning supply
New competition

Question 4

consequences of low CU

Answer 4

• High fixed costs/unit will reduce profitability
• If visible could give a poor impression to potential customers
  Underused staff
• high fixed costs per unit will make the firm uncompetitive, fixed costs shared over a lower level of output
• Not as competitive

Question 5

benefits of low CU

Answer 5

• Short term, no → means the firm can react quickly to a new order (useful if the firm is expanding into a new market), there is time for training staff and maintenance

Question 6

benefits of high CU

fixed costs

Answer 6

• Good → fixed costs per unit are lower, this is good for companies with HIGH FIXED COSTS (production, airports etc), leading to COMPETITIVE ADVANTAGE

Question 7

drawbacks of high CU

Answer 7

• However average costs will be higher than necessary:
• No time for maintenance leading to breakdowns
• Not possible to take on unexpected orders, cannot cope with unprecedented change
• NOT FLEXIBLE
• Can lead to a decrease in quality and competitiveness

Question 8

ways to reduce low CU

increasing product range, giving out excess capacity

Answer 8

• Extend the product range and promote new products
• Focus on the marketing effort to generate increased demand
• Rent excess capacity to other businesses, to make own brand products
• In LR: close excess capacity, sell some property or machines

Question 9

ways to reduce high CU

Answer 9

• Identify and tackle bottlenecks and shortages, recruit more employees → night shifts, longer hours
• Outsource or subcontract some of the production to other businesses
• Consider training schemes to raise labour productivity
  Invest in increased capacity