capacity utilisation

Question 1

what is capacity utilisation

Answer 1

measures what proportion or percentage of the theoretical max possible output is actually produced

Question 2

what is meant by full capacity

Answer 2

means that all the resources available to the firm are being used to the fullest extent all of the time

Question 3

what is meant by spare capacity

Answer 3

means that for some of the time some resources are not being used and therefore there is a loss of potential output

Question 4

capacity utilisation formula

Answer 4

current output
———————- x100
max possible output

Question 5

what is meant by under utilisation of capacity

Answer 5

means that capital equipment is lying idle some of the time
business is producing less than it actually could, average costs rise bcs fixed costs are shared across less output
not as competitive as it could be

Question 6

what is meant by over- utilisation of capacity

Answer 6

means that a business is trying to produce more than its capital equipment was designed for
average costs will be higher than necessary
not as competitive as it could be

Question 7

how can a business reduce under- utilisation of capacity

Answer 7

extend product range and promote products
focus on marketing to increase demand
rent excess capacity to other businesses

Question 8

how can a business reduce over utilisation of capacity

Answer 8

identify and tackle bottlenecks and shortages, recruit more employees
outsource some of the production to other businesses
consider training schemes to raise labour productivity
invest in increased capacity