Capacity Utilisation 2.4.2

Question 1

What is over utilisation?

Answer 1

When a business is operating beyond efficient capacity - producing more than it can sustainably manage. This can lead to pressure on resources, machinery breakdowns and lower quality, no flexibility to respond to new orders, staff under a lot of pressure which can increase staff turnover, machines pushed to limits.

Question 2

What is under utilisation?

Answer 2

When a business is operating below full capacity - meaning its not using all of its resources e.g. machines, workers, space.
This leads to inefficiency and higher unit costs because fixed costs are spread over fewer units of output, workers may be under deployed leading to fears of redundancy.
It does provide flexibility: opportunity to engage workers in maintenance tasks, a business can respond to sudden increases in demand.

Question 3

What is capacity utilisation?

Answer 3

The percentage of maximum available output that is being produced and what determines maximum output is physical resources (space, machinery) and human resources (staff), both in collaboration will create the maximum available output.
Actual output/ max output x 100 = capacity utilisation

Question 4

Why is capacity utilisation important and how do you improve it?
(When you can’t produce enough to meet level of demand)

Answer 4

This is important because the higher the capacity utilisation, the more units a business produces which allows fixed costs to be spread over more units. It leads to lower unit costs and therefore more profitable with each unit they sell.
How do you improve?
-Outsource production (pay another company to do something for the other) Cons: less control of quality.
-Redeployment: mover under used resources to other parts of the business that require them but retraining and relocating costs may increase
-Increase sales: requires more units to be produced
-Reduce capacity: sell fixed assets/reduced staffing levels to remove excess capacity but flexibility to respond to increased demand is reduced.
-Increase workforce hours
-Reduce maintenance

Question 5

What will high capacity utilisation lead to?

Answer 5

-Minimises average total costs and increases business’ competitiveness
-If workers are busy, they are more likely to feel secure in their employment
-A business that is likely to be well thought of by customers and will attract customers who are willing to wait for products to be delivered.