4.2b - Capacity

Question 1

Capacity definition

Answer 1

The maximum output that a business can produce in a given period

Question 2

What does capacity depend on?

Answer 2

• Number of employees
• Skill level of employees
• Technology available
• Kind of production process used
• Investment

Question 3

Capacity utilisation definition

Answer 3

The percentage of total capacity that is being achieved

Question 4

Under-utilised / spare capacity definition

Answer 4

When output it too little

Question 5

How can a business deal with under-utilised capacity?

Answer 5

• Stimulate demand by lowering price
• Fill capacity by outsourcing for other firms
• Close part of production facilities to reduce capacity
• Reduce capacity by stopping overtime

Question 6

Capacity shortage definition

Answer 6

When output is too much

Question 7

Capacity utilisation formula

Answer 7

(Actual level of output / maximum level of output) X 100

Question 8

Advantages of operating below max output:

Answer 8

• More time for maintenance and repair
• Less pressure
• Cope better with sudden increase in demand
• Maintain quality

Question 9

Disadvantages of operating below max output:

Answer 9

• Higher proportion of fixed costs per unit
• Lower profit
• Employees become demoralised

Question 10

What situation would cause a business to operate below max output:

Answer 10

• New competitors
• New product entering the market
• Fall in demand
• Seasonal demand
• Merger

Question 11

Disadvantages of working at high capacity:

Answer 11

• Adverse effect on quality
• Added workload and stress
• Loss of sales as less able to meet sudden increases in demand

Question 12

How can capacity be increased?

Answer 12

• Build or extend factories
• Encourage overtime
• Hire new staff
• Outsourcing