2.3.2 Capacity utilisation

Question 1

what is full capacity?

Answer 1

means that all the resources available to the firm are being used to the fullest extent all of the time

Question 2

what is spare capacity

Answer 2

means that for some of the time some resources are not being used and therefore there is a loss of potential output

Question 3

what is capacity utilisation

Answer 3

measures what proportion or percentage of the theoretical maximum possible output is actually produced.

Question 4

formula for capacity utilisation

Answer 4

current output / maximum possible output x 100

Question 5

what is under-utilisation of capacity?

Answer 5

means the capital equipment is lying idle some of the time; it means that productivity is lower than it could be

Question 6

implications of under-utilisation of capacity?

Answer 6

• wasteful / capital is lying idle some of the time
• average costs rise because fixed costs are shared across a lower level of output
• business is not as competitive as it could be

Question 7

what is over-utilisation of capacity?

Answer 7

means that the business is trying to produce more than its capital equipment was designed for

Question 8

implications of over-utilisation of capacity?

Answer 8

• business is not as competitive as it could be
• average costs higher than necessary; bottlenecks, breakdowns and overcrowding reduce efficiency
• staff are overworked

Question 9

ways to reduce under-utilisation?

Answer 9

• rent excess capacity to other businesses
• increase demand through marketing
• close excess capacity (sell some machinery or make people redundant)

Question 10

ways to reduce over-utilisation?

Answer 10

• invest in increasing capacity
• train staff to rise labour productivity
• outsource to other businesses
• identify and tackle bottlenecks in production, recruit more employees