Capacity utilisation 2.4.2

Question 1

What is Capacity utilisation?

Answer 1

Capacity utiliation is the proportion of maximum output capacity currently being achieved.

Question 2

How to calculate capacity utilisation?

Answer 2

current output level X 100
__________________
maximum output level

Question 3

What happens when capacity utilisation is at a high rate?

Answer 3

When capacity utilisation is at a high rate, average fixed costs will be spread out over a large number of units – unit fixed costs will be relatively low.

Question 4

What happens when capacity utilisation is low?

Answer 4

When capacity utilisation is low, average fixed costs will be spread out over a fewer number of units – unit fixed costs will rise.

Question 5

Advantages of full capacity?

Answer 5

• Average fixed costs will be at their lowest level and this should help to lift profits.
• Less wasted space.
• Staff are productive.

Question 6

Disadvantages of full capacity?

Answer 6

• Staff may feel under pressure due to the workload and this could raise stress levels which could increase staff turnover.
• Regular customers who wish to increase their orders will have to be turned away or kept waiting for long periods.
• Machinery will be working flat out and there may be insufficient time for maintenance and preventive repairs.

Question 7

What is Excess capacity?

Answer 7

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

Question 8

What happens with low levels of capacity utilisation?

Answer 8

Low levels of capacity utilisation lead to high unit fixed costs.

Question 9

Advantages of under capacity?

Answer 9

• Effective quality control.
• Less stress on staff.

Question 10

Disadvantages of under capacity?

Answer 10

• Missed sales opportunities.
• Wasted resources (space, staff)

Question 11

What are 7 causes of spare capacity for a business?

Answer 11

• Quality (brand image)
• Competitors
• Demand
• Ethical stance = boycott
• Productivity (motivation, turnover, absenteeism
• Taste and trend
• Change in economy (recession)

Question 12

What are 8 ways a business can increase/improve capacity utilisation?

Answer 12

• Marketing (promotion/new product/ad)
• Decrease price
• Reduce capacity (reduce staff, Change premises
• Nothing (temporary)
• Boost demand (innovation)
• Motivate staff (financial and non financial)
• Sub contracting for someone else
• Rationalisation

Question 13

Define Under-Utilisation of Capacity

Answer 13

Where a firm’s actual output is below the maximum possible output.

Question 14

What are three causes of under-utilisation?

Answer 14

Poor quality leading to lack of demand, Seasonal demand, Changes in tastes or fashion.

Question 15

What % capacity utilisation will a business aim for and why?

Answer 15

90% - allows some opportunity to maintain and repair equipment and respond to customer demand whilst keeping fixed costs spread efficiently.

Question 16

Define Capacity Shortage

Answer 16

Where there is not enough capacity to fulfil customer orders.

Question 17

In order to improve capacity utilisation a firm needs to…

Answer 17

Match production closely to the level of demand.

Question 18

What are four ways of adjusting demand?

Answer 18

Decreasing price so that more people can afford it, Move online to be more accessible, Improve the quality of the products, Increase promotion.

Question 19

Define Rationalisation

Answer 19

A process of improving efficiency by cutting back on the scale of operations - reducing capacity.

Question 20

What are three ways to rationalise a business?

Answer 20

Decrease number of staff, Buy less resources/materials, Decrease operating hours.

Question 21

What is rationalisation?

Answer 21

Reorganising production in order to increase productivity and efficiency.