chapter 11 - capacity utilisation

Question 1

capacity

Answer 1

the maximum amount of output achievable if all resources are fully utilised in a given period of time

Question 2

capacity utilisation

Answer 2

a measure of the percentage of potential output being achieved

Question 3

capacity utilisation equation

Answer 3

actual output ÷ production capacity × 100

Question 4

net investment

Answer 4

spending on new capital equipment beyond replacing worn out equipment, increasing productive capacity

Question 5

over utilisation

Answer 5

the firm is ‘sweating its assets’ they are being made to work hard for the business = lower unit costs

Question 6

under utilisation

Answer 6

resources are not being made to work effectively for the business = high unit costs

Question 7

3 ways to increase capacity

Answer 7

1. acquiring more resources
2. bigger premises, more machinery
3. introducing a 3rd shift

Question 8

3 ways to decrease capacity

Answer 8

1. downsizing resources
2. laying off workers, smaller premises
3. less machinery

Question 9

4 reasons as to why a form would operate at less than 100% capacity

Answer 9

1. strategic - able to respond to changes in levels of demand
2. maximum capacity had recently increased
3. firm has time to fix machines without stopping production
4. maintain staff morale

Question 10

what may happen if a firm operates at less than 100% capacity

Answer 10

1. demand has fallen / loss of market share
2. they have become inefficient
3. average fixed costs per unit of output increase, so profitability falls and prices might increase - decreasing demand. Firms become less competitive

Question 11

what may a firm do if under utilised

Answer 11

1. increase demand
2. downsize
3. lease off spare equipment

Question 12

what may a firm do if over utilised

Answer 12

1. reduce demand
2. outsource parts of the business operating
3. increase capacity by investing in more resources

Question 13

what will actions taken by the business depend on

Answer 13

1. business objectives
2. whether the issue is seen as short term or long term
3. ease with which options could be implemented

Question 14

3 reasons for being at nearly full capacity

Answer 14

1. High levels of efficiency
2. economies of scale improved
3. indicates an expected level of demand

Question 15

5 problems with being at nearly full capacity

Answer 15

1. employees become demotivated and stressed
2. quality could be affected due to a rushed production process
3. removes its ability to quickly respond to increases in demand
4. stress / poor communication can lead to diseconomies of scale
5. breakdowns in production cannot be addressed without affecting the production process