2.4.2-Capacity Utilisation

Question 1

What is capacity?

Answer 1

A measure of how much output a business can achieve in a given period

Question 2

What is capacity utilisation?

Answer 2

The proportion of a businesses capacity that is actually being used over a specific period

Question 3

What is the formula for capacity utilisation?

Answer 3

Capacity utilisation = (current output / maximum possible output) x 100

Question 4

Why is capacity utilisation important?

Answer 4

It’s a useful measure of productive efficiency since it measures whether there are unused resources in the business
As output rises average production costs tend to fall so higher utilisation can reduce unit costs making a business more competitive (businesses to aim to produce as close to full capacity - 100% utilisation as possible in order to minimise unit costs
High-level of capacity utilisation is required if a business has a high breakeven output due to significant fixed costs of production

Question 5

What are implications of under utilisation of capacity?

Answer 5

-Fixed costs don’t change in relation to output therefore when a business produces less the fixed cost is spread over fewer units of output so the average cost per unit will increase
-If there is too much spare capacity workers may become bored or fear for their job security which negatively impacts motivation
-Can impact brand image of a business for example if a café is always empty customers may perceive the café to be poor quality

-Periods of underutilisation can be used to train workers and perform routine maintenance that may be difficult during busy periods
-If the business has spare capacity it may be able to take on new orders compared to a business which is operating at 100% utilisation

Question 6

What are implications of overutilisation of capacity?

Answer 6

-May struggle to take on new orders unless it finds a way to increase capacity in the short term such as increasing overtime although this leads to high labour costs
-Quality could suffer if workers make mistakes during the production process due to rushing or being too busy

-Results in lower unit costs which can make the business more competitive
-Can increase motivation as workers feel security in their jobs however if they’re too busy it would have the opposite effect
-Give better brand image eg. A restaurant that is always full might create a more favourable reputation however if it is difficult to get a table customers may go elsewhere

Question 7

How could a business improve capacity utilisation?

Answer 7

Reduce capacity-if a business has spare capacity reducing capacity will lead to improved capacity utilisation this could be achieved by moving to a smaller premises, making staff redundant or selling wanted/under utilised assets

Marketing-more or better marketing could allow a business to increase sales which in turn can lead to increased capacity utilisation

Outsourcing - delegating one or more business procedures to an external provider can help a business respond to sudden and unexpected increases in demand

Capacity utilisation can be improved via indirect methods for example a competitor going out of business and the other businesses in the market may find their capacity utilisation improving