Capacity utilisation

Question 1

Define CAPACITY

Answer 1

Capacity is the maximum level of output a business can achieve in a given period of time.

Question 2

How can capacity change?

Answer 2

• Machine having maintainence (reduced capacity)

- Staff working more shifts (increased capacity)

Question 3

Define CAPACITY UTILISATON

Answer 3

Capacity utilisation is the percentage of a business’ capacity that is actually being used over a specific period.

Question 4

How is capacity utilisation calculated?

Answer 4

Capacity utilisation = (actual output/total possible output) x 100

Question 5

Define UNDER UTILISATION OF CAPACITY

Answer 5

Under utilisation of capacity means that the business has low levels of capacity utilisation e.g. around 35%. It is caused by new competitors, changing trends in the market, unsuccessful marketing or seasonal demand.

Question 6

What are the positive effects of under utilisation of capacity?

Answer 6

• Firm is able to meet sudden increases in demand
• More time for maintainence
• More time for staff training

Question 7

What are the negative effects of under utilisation of capacity?

Answer 7

• Higher unit costs
• Lower profit margins
• Staff motivation may fall
• Negative brand image

Question 8

What are the solutions for under utilisation of capacity?

Answer 8

• Do nothing
• Increase marketing activity
• Cut capacity
• Subcontract

Question 9

Define OVER UTILISATION OF CAPACITY

Answer 9

Over utilisation of capacity is when the business has high levels of capacity utilisation e.g. 99 or 100%. It is caused by changing tastes in the market, successful marketing or seasonal factors.

Question 10

What are the positive effects of over utilisation of capacity?

Answer 10

• Lower unit costs
• Improved profitability
• Increased job security and staff morale

Question 11

What are the negative effects of over utilisation of capacity?

Answer 11

• Extra stress on staff may lead to mistakes
• Overtime costs may be high
• The business will be unable to meet additional customer orders
• There us not enough time for maintainence or staff training.

Question 12

What are the solutions for over utilisation of capacity?

Answer 12

• Do nothing
• Expand capacity
• Subcontract
• Increase price