Capacity Utilisation

Question 1

What is meant by capacity?

Answer 1

Describes the maximum possible output of a business

Question 2

What is meant by capacity utilisation?

Answer 2

The proportion of maximum capacity being used by the business

Question 3

What is the formula for capacity utilisation?

Answer 3

Current output/ maximum possible output x 100

Question 4

3 implications to a business of under utilisation

Answer 4

• lead to fears for job security among staff, damaging motivation
• cause poor morale among managers
• contribute to poor reputation for the business, especially in the service sector

Question 5

2 ways of improving capacity utilisation

Answer 5

• increase current output: use marketing methods to boost the volume of sales, cut selling price
• reduce maximum capacity: selling off assets or laying off staff

Question 6

State 2 reasons why 100% capacity utilisation can be a problem

Answer 6

• form may be unable to accept any new orders, potentially turning away new customers to rivals
• there will be little or no time to carry out maintenance on machines or train staff

Question 7

Why is capacity utilisation an important concept?

Answer 7

• useful measure of productive efficiency since it measures whether there are unused reservoirs in the business

Question 8

Reasons why businesses operate below full capacity

Answer 8

• lower than expected market demand
• a loss of market share
• seasonal variations in demand
• recent increase in capacity
• maintenance and repair programmes