2.4.2

Question 1

What is Capacity?

Answer 1

The maximum level of output a firm can produce in a given period of time.

Question 2

What is capacity utilization?

Answer 2

The level of output a firm is producing at, in relation of its maximum capacity.

Question 3

What is Under-Utilization?

Answer 3

If a business has a capacity underutilization, it is not utilizing resources efficiently.

Question 4

What are 2 problems with Under-Utilization?

Answer 4

Fixed costs are spread over fewer units so there is a higher average total cost.

Workers may be underemployed, so fears of redundancy may cause them to look to rivals for jobs.

Question 5

What is Over Utilisation?

Answer 5

When a business is operating at more than maximum capacity.

Question 6

Why is Over utilization a problem?

Answer 6

Business doesn’t have flexibility to respond to new orders, meaning they may have to turn orders down and have a bad reputation

Staff are under lots of pressure this may cause mistakes.

Question 7

How to help Under Utilization 2 methods?

Answer 7

Increase Demand by using marketing methods.

Rationalization - Downsize the entire organisation to lower the maximum capacity

Question 8

How to help Over Utilization 2 methods?

Answer 8

Short term -Reduce demand or outsource
Long term - Expand business