What does “capacity” mean in business operations?
Capacity is the maximum level of output a business can produce in a given time period.
Give 3 examples that illustrate business capacity.
Fast-food outlet: 1,000 customers/hour
Call centre: 10,000 calls/day
Car factory: 50,000 cars/year
Why is managing capacity crucial for business performance?
It ensures a business can meet demand, generate revenue, and avoid losing sales or orders due to limited output.
What are the main costs associated with maintaining capacity?
Equipment (e.g. production line)
Facilities (e.g. rent, insurance)
Labour (e.g. wages)
How does capacity relate to unit costs?
Higher capacity utilisation spreads fixed costs over more units, reducing unit costs and increasing competitiveness.
How is capacity utilisation calculated?
(Actual Output / Maximum Possible Output) x 100
If a factory produces 75,000 units but can make 100,000, what is the capacity utilisation?
(75,000 ÷ 100,000) × 100 = 75%
Give 3 reasons why capacity utilisation is important.
Measures productive efficiency
High utilisation lowers unit costs
Required for businesses with high fixed costs and break-even output
What are 3 reasons why businesses operate below full capacity?
Drop in market demand
Seasonal variation
Recently increased capacity
Why is persistently low capacity utilisation dangerous?
It increases unit costs, reduces competitiveness, and may signal inefficiency or lack of demand.
Name 3 disadvantages of running at very high capacity.
Equipment maintenance is harder to schedule
Staff stress and absenteeism may rise
Lower responsiveness to sudden demand changes
How can high capacity utilisation affect customer experience?
It can lead to longer wait times and poorer service quality due to stretched resources.
What are 3 ways a business can increase capacity quickly?
Increase workforce hours (e.g. overtime or temp staff)
Subcontract production
Reduce time spent on maintenance
Is 100% capacity utilisation always ideal?
No – while it reduces costs, it limits flexibility, increases employee strain, and can hurt quality and service.
Why does high capacity utilisation matter for firms with high fixed costs?
They need high output to break even and stay profitable due to large fixed cost burdens.
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2.1.1 and 2.1.2 - Sources & Methods of Finance67
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2.1.3 - Liability8
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2.1.4 - Planning15
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2.2.1 - Sales Forecasting11
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2.2.2 - Sales, Revenue and Costs12
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2.2.3 - Break Even15
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2.2.4 - Budgets24
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2.3.1 - Profit38
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2.3.2 - Liquidity15
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2.3.3 - Business Failure7
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2.5 - Interest and Inflation Rates23
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2.5 - Exchange Rates13
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2.5 - Government and the Economy17
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2.5 - Business Legislation14
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2.5 - Employment Legislation21
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2.5 - Competition20
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2.1.1 and 2.1.2 - Sources & Methods of Finance67
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2.2.4 - Budgeting24
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2.3.1 - Profit38
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2.4.1 - Production, Productivity and Efficiency32
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2.4.2 - Capacity Utilisation15
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2.4.3 - Stock control15
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2.4.4 - Quality management20
