2.4.2

Question 1

What is capacity utilisation?

Answer 1

The proportion (percentage) of a business’ capacity that is actually being used over a specific time period

Question 2

How is capacity utilisation calculated?

Answer 2

ACTUAL LEVEL OF OUTPUT/POSSIBLE LEVEL OF OUTPUT x 100

Question 3

Why might a business operate below maximum capacity?

Answer 3

• Lower than expected market demand
• Loss in market share
• Seasonal variation in demand
• Product diversification
• Maintenance and repair programmes

Question 4

What is capacity?

Answer 4

The potential output of a business measured in terms of units of output over a specific period

Question 5

What is excess capacity?

Answer 5

Where actual output is less than capacity

Question 6

What is excess demand?

Answer 6

Where demand for a business’ products or services is greater than the business capacity

Question 7

What are some drawbacks of high capacity utilisation?

Answer 7

○ Less time for repair/maintenance with increase risk of breakdown
○ Less quality control as production is rushed
○ High stress, demotivation, absenteeism from added workload
○ Customer service may decrease
○ Loss of sales

Question 8

How might a business increase capacity utilisation?

Answer 8

○ Can be possibly be in the short-term
○ Increase workforce hours - extra shifts, encourage overtime, temporary staff
○ Sub-contract some production activity - assembly of components
○ Reduce time spent maintaining production equipment

Question 9

Risks of operating below capacity?

Answer 9

○ Higher unit costs - impact on competitiveness
○ Less likely to reach breakeven output
○ Capital tied up in under-utilised assets