4.2b Capacity

Question 1

Capacity definition

Answer 1

Maximum output that a business can produce in a given period with the available resources

Question 2

Capacity utilisation definition

Answer 2

Percentage of total capacity that is actually being achieved in a given time period

Question 3

Capacity shortage definition

Answer 3

Too much output

Question 4

Under-utilised/spare capacity definition

Answer 4

Too little output

Question 5

Capacity utilisation formula

Answer 5

Capacity utilisation = (actual level of output ÷ maximum possible output) x 100

Question 6

Advantages of operating below max output

Answer 6

• More time to maintenance and repair
• Less pressure
• Can cope better with sudden increase in demand

Question 7

Disadvantages of operating below max output

Answer 7

• Higher proportion of fixed cost per unit
• Lower profit levels
• Negative image

Question 8

Disadvantages of working at high capacity

Answer 8

• Negative effect on quality possible
• Employees suffer from added workloads and stress
• Loss of sales as less able to meet sudden increases in demand

Question 9

Capacity can be increased by

Answer 9

• Building new factories
• Encouraging staff overtime
• Hiring new staff
• Outsourcing

Question 10

What does capacity depend on?

Answer 10

• Number of employees
• Technology the business has
• Production process used e.g. lean production
• Investment in business

Question 11

How can businesses deal with spare capacity?

Answer 11

• Stimulate demand by changing marketing mix
• Fill spare capacity by outsourcing for other firms
• Reduce capacity by closing down part of production
• Reduce capacity by stopping overtime
• Reduce capacity by making staff redundant