Chapter 38- Capacity Utilisation

Question 1

Capital utilisation

Answer 1

• Is about the use that a business makes of its resources – if
  a business is not able to increase output – it is said to be
  running at full capacity – its capacity utilisation is 100%
• Businesses do not always operate at full capacity – it is
  not possible to keep all recourses and machinery fully
  employed all the time – however, most businesses would
  wish to be operating at close to full capacity.

= current output/maximum possible output x 100

Question 2

Implications of under-utilisation

Answer 2

• A business might be under-utilising capacity if it has experienced a drop-in demand, due for example to an increased competition in the market

Drawbacks: It will not be making the most of its recourses – it may be operating inefficiently because its unit costs are not minimised – it may also affect the morale of workers as they may feel that the business is struggling to generate orders – this might mean workers feel insecure in their jobs

Benefits: A business would be able to cope more easily with sudden increases in demand – customers might go to rivals that are able to deal with demand fluctuations if this is not the case – both workers and managers will be more relaxed and comfortable with their workloads

Question 3

Implications of over-utilisation

Answer 3

• Many businesses would prefer to operate at close to full capacity because average costs are lower – however, if a business is running at full capacity it might be over-utilising its recourses meaning they are stretched uncomfortably

Drawbacks: The pressure of constantly working at full capacity can put a strain on some of the recourses – as well as coursing stress and tiredness to the workforce, possibly increasing the risk of accidents. – machinery may be overworked to breaking point

Benefits: Average costs will be lower because fixed costs will be spread across more units of output – this will help improve competitiveness and raise profits – staff motivation may be high as they feel secure in their jobs

Question 4

Ways of improving capacity utilisation

Answer 4

Reduce capacity: A business might decide to cut capacity such as reducing staff and selling off unused fixed assets

Increased sales: if a business sells more of its output – it will have to produce more and thus capacity utilisation will rise – A business might need to spend more on promotion to increase sales

Increased usage: discounts for off-peak travel on trains create a high incentive for a balanced usage.

Outsourcing: Capacity utilisation can vary considerably within a business – where capital equipment has low utilisation rates, it might be more efficient for the businesses to cub-contract or outsource the work