Capacity utilisation

Question 1

Capacity utilisation

Answer 1

the proportion of maximum output capacity currently being achieved

current output level / maximum output level x 100 = rate of capacity utilisation

• determining operational efficiency

Question 2

Excess capacity

Answer 2

exists when the current levels of demand are less than the full capacity output of a business, also known as spare capacity

Question 3

Rationalisation

Answer 3

reducing capacity by cutting overheads to increase efficiency of operations, often involving redundancies

Question 4

Full capacity

Answer 4

when a business produces at maximum output

Question 5

Capacity shortage

Answer 5

when the demand for a business’s products exceeds production capacity

Question 6

Outsourcing

Answer 6

using another business to undertake a part of the production process rather than doing it within the business using the firm’s own employees

Question 7

Business-process outsourcing

Answer 7

a form of outsourcing that uses a third party to take responsibility for certain business functions

Question 8

Capacity utlisation – impact on average fixed costs, advantage

Answer 8

• when utilisation is at a high rate, average fixed costs will be spread out thin – fixed costs become low
• 100% capacity utilisation = lowest possible fixed costs
• job security for employees

Question 9

Capacity utilisation – impact on average fixed costs, disadvantage

Answer 9

• low motivation levels due to workload
• customers cannot increase orders, losing long-term clients
• machinery working 24/7, no time for maintenance

Question 10

Solving short-term excess capacity

Answer 10

1. maintain output and produce for stocks
   adv:
   - no part-time working for staff
   - job security for staff
   - stocks can be sold at times of rising demand
   - job security for staff
   disadv:
   - increase storage costs
   - demand may not increase as expected – goods have to be sold at discounted price
2. introduce more flexibility into production
   adv:
   - production can be varied according to demand levels
   - other products can be produced that may follow a different demand pattern
   - avoid build-up of stock
   - reduce storage costs
   disadv:
   - reduce worker motivation
   - expensive equipment
   - increase training costs

Question 11

Evaluating the options of operating at full capacity

Answer 11

1. increasing production capacity
   - cost of expansion
   - source of finance for expansion
   - how long the expansion will take
   - future demand levels
2. keep existing capacity, more outsourcing
   - importance of work
   - whether the business can give up control over the work
   - quality assurance
3. keep existing capacity
   - cost of other options
   - future demand levels
   - whether quality will be compromised
   - whether staff can cope with increased workload
   - whether firm can meet future unexpected orders
   - whether machines can be serviced sufficiently

Question 12

Solving long-term excess capacity

Answer 12

1. rationalisation
   ADV:
   - reduces overheads
   - higher capacity utilisation
   DISADV:
   - redundancy costs for staff payments
   - low capacity and disappointed customers in high demand season
   - loss of job security
   - possibility of industrial action
2. research and development into new products
   ADV:
   - increased business competitiveness
   - if done quick, can avoid rationalisation disadvantages
   DISADV:
   - expensive
   - may take too long to prevent cutbacks in capacity and rationalisation
   - requires long-term planning to be effective, not good for time crunch

Question 13

Capacity shortage, advantage and disadvantage

Answer 13

ADV:
- no wastage
- low costs bc operated at 100% capacity utilisation
DISADV:
- lost sales
- customers not satisfied, reduces future sales

Question 14

How to deal with long-term capacity shortage

Answer 14

1. outsourcing supplies
   ADV:
   - quick to arrange
   - no major capital investment
   - offers much greater flexibility (able to end contracts if demand falls back)
   DISADV:
   - less control over quality of output
   - high transport and administration costs
   - unreliable delivery times
2. expansion of production facilities
   ADV:
   - long term increase in capacity
   - in control of quality of product and delivery times
   DISADV:
   - high capital cost
   - increases total capacity, but problems could occur if demand should fall for a long period of time
   - time consuming to build new facility – customers impatient during high demand

Question 15

Reasons for outsourcing

Answer 15

1. shortage of capacity
2. reduction and control of operating costs
3. access to quality service or resources that are unavailable internally
4. freed-up internal resources (e.g. less office space

Question 16

Drawbacks in outsourcing

Answer 16

• low internal staff motivation can lead to loss of jobs
• quality issues
• security risk (e.g. outsourcing IT functions)