2.4.2 Capacity Utilisation Flashcards
Definition
A measure of the extent to which the productive capacity of a business is being used over a specific period
Formula
Actual output/ maximum possible output x 100
Implications on costs of under utilisation of capacity
Unit costs rise so operating margins reduced- avg fixed costs per unit of output rise so profitability falls . This might have to be offsetted to consumers in the form of higher prices, therefore making firms less competitive. Significant when fixed costs are a high proportion of total costs e.g. running a hotel. Also means unable to exploit EOS so more costs. Means loss of market share
Problem of under utilisation if not carefully considered
Short-sighted companies may react to low capacity utilisation through redundancies but the cause may be short-term e.g. recession
Problems in service sector of low capacity u
Bad rep- deter customers e.g. empty cafe
Cash flow implication of under cap u
Capital tied up in under-utilised assets, could upset shareholders and have an impact on working capital
Under utolisation more implications
Less likely to reach BE output, employees demotivated and bored also fears over job security (bring in motivational theorists) so low productivity and high turnover, idle resources
Implications of over utilisation of capacity- time
Not enough time to service or properly maintain machinery so product recalls and quality issues to effect brand image. Prone to breaking down so may have to delay orders which would damage rep. Also less time for staff training. Less time for quality control
Implications of over utilisation of capacity- inflexibility
Unable to accept new orders, loss of revenues and potentially turning away new customers to rivals
Implications of over utilisation of capacity- staff
Excessive pressure and stress, absenteeism rates& high labour turnover. Negative impact on quality. Unit vosts may rise as a businesz approaches maximum capacity due to stress, mistakes and diseconomies
How to increase capacity to improve capacity utilisation
Offer overtime pay, temporary contracts, marketing to create demand, make products got other businesses looking to subcontract work
How to decrease capacity to improve capacity utilisation
Rationalisation (redundancies/sale of assets)
Why is capacity utilisation important
Useful measure of productive efficiency since it measures whether there are idle resources in the business AND helps in decision-making
Depends on
If the causes of capacity utilisation issues are short term or long term
Where should a business decide to operate
Close to full capacity to avoid waste and boost profitablility
