2.4.2 Capacity Utilasation

Question 1

What is capacity

Answer 1

The maximum amount of output achievable if all resources are fully utilised

Question 2

In the long run capacity can be increased by

Answer 2

Acquiring more resources

Eg bigger premises , more machinery , introducing a 3 rd shift

Question 3

In the long run capacity can also be reduced by

Answer 3

Downsizing resources

Laying off workers
Smaller premises
Less machinery

Question 4

A business will aim to match capacity to

Answer 4

Demand

Question 5

What is capacity utilisation

Answer 5

Measure of the percentage of potential output being achieved

Affects whether resources are being used efficiently or whether they are not being used

Question 6

How do you work out capacity utilisation

Answer 6

Current output / maximum possible output x 100

Question 7

Under utilisation of capacity will mean that resources

Answer 7

are not being made to work effectively for the business, this will result in high unit costs

Question 8

Over utilisation of capacity will mean that

Answer 8

• Over utilisation of capacity will mean the firm is “sweating “ its assets i.e. they are being made to work hard for the business
• This will result in lower unit costs
• But may affect quality and cause stress to the resources e.g. workers being pushed to work hard or no maintenance time for market

Question 9

Importance of capacity

Answer 9

• Ability to match supply to demand
• Inverse relationship between capacity utilisation and unit costs
• Image / public perception
• Workforce motivation
• Ability to achieve business objectives

Question 10

How to utilise capacity efficiency if under utilised

Answer 10

Increase demand
Downsize
Lease off spare capacity

Question 11

How to utilise capacity efficiency if over utilised

Answer 11

Reduce demand
Outsource parts of the business operations
Increase capacity by investing in more resources