2.4.2 - Capacity Utilisation

Question 1

Definition of capacity

Answer 1

The capacity of a business is a measure of how much output a business can achieve in a given output

Question 2

Definition of capacity utilisation

Answer 2

The portion (percentage) of a business’ capacity that is actually being used over a specific period

Question 3

Formula for capacity utilisation

Answer 3

(actual level of output/max possible output) x 100

Question 4

What are the dangers of operating at a low capacity utilisation?

Answer 4

• Higher unit costs, may have an impact on competitiveness
• Less likely to reach breakeven output
• Capital tied up in under-utilised assets

Question 5

What are the dangers of operating at a high capacity utilisation?

Answer 5

• May have a negative effect on quality: production is rushed meaning less time for quality control
• Employees may suffer: added workloads and stress can be demotivating if sustained for too long
• Loss of sales: will be less able to meet sudden or unexpected changes/increases in demand, production may require repairs

Question 6

How can a business improve their capacity utilisation?

Answer 6

• Increase sales: requires more units to be produced and promotional spending may need to be increased
• Increased usage: encourage sales when demand is usually lower stabilises capacity utilisation but prices may need to be lowered
• Outsourcing: subcontracting some tasks to outside businesses can increase the level of output but profit margins may be reduced
• Reduce capacity: sell fixed assets or reduce staffing levels to remove excess capacity but flexibility to respond to increased demand is reduced
• Redeployment: move underused resources to other parts of the business that require them but retraining staff and retooling costs may increase

Question 7

What is the importance of capacity utilisation?

Answer 7

Capacity utilisation is a useful measure of productive efficiency since it measures whether there are idle (unused) resources in the business

Question 8

Why do businesses operate below 100% capacity utilisation?

Answer 8

• Lower than expected market demand
• A loss of market share
• Seasonal variations in demand
• Recent increase in capacity
• Maintenance and repair programmes

Question 9

Can businesses operate above 100% capacity utilisation? If so, how?

Answer 9

• Can be possible but only in the short term
• Increase workforce hours (extra shifts, encourage overtime, temporary staff)
• Sub-contract some production activities
• Reduce time spent maintaining production equipment