2.4.2 Capacity utilisation

Question 1

define capacity utilisation

Answer 1

the use that a business makes of its resources

Question 2

define excess capacity

Answer 2

when a business has too many resources like labour, to produce its desired level of output

Question 3

define full capacity

Answer 3

the point where a business can’t produce any more output

Question 4

define mothballing

Answer 4

leaving machines, buildings or equipment unused but maintained so they could be bought back into use if neccessary

Question 5

define over-utilisation

Answer 5

the position where a business is running at full capacity and straining resources

Question 6

define rationalisation

Answer 6

reducing the number of resources like labour, put into the production process usually undertaken because a business has excess capacity

Question 7

define under-utilisation

Answer 7

the position where a business is producing at less than full capacity

Question 8

explain what is meant by capacity utilisation

Answer 8

-the use that a business makes of its resources
-if can’t increase output =full output at 100%
-business don’t always operate at full capacity and most likely operate at less than full
-not possible to keep all resources and machinery employed

Question 9

how do we measure capacity utilisation?

Answer 9

CU = (Current output/ Maximum possible output ) x100

Question 10

what are the negative implications of under-utilisation?

Answer 10

-not making the most of its resources as it will be operating inefficiently as unit costs are not minimised -> when raised from 60-80% unit costs fall from £2.42 to £2.31
-impact morale of workers as they may feel the business is struggling to generate orders -> feel insecure in their jobs

Question 11

what are the benefits of under-utilisation?

Answer 11

-easily be able to meet sudden changes in demand
-less work related stress -> reduced sickness and absenteeism

Question 12

what are the negative implications of over-utilisation?

Answer 12

-pressure outs strain on the resources
-increased sickness and absenteeism
-increased risk of accidents
-machines may be overworked to breaking point
-can’t respond to sudden changes in demand

Question 13

what are some of the benefits to over-utilisation?

Answer 13

Average costs are lower as fixed costs are spread across more units of output
-increase competitiveness and raise profits
-improved staff motivation -> feel secure in their jobs
-happier employees as more opportunities to increase their earnings

Question 14

what are four methods of improving capacity utilisation?

Answer 14

reduce capacity -> sell fixed assets
increase sales -> more output can be sold -> more needs to be produced (only if total costs are covered by the extra revenue)
Outsource -> hiring others to do the job at a cheaper cost
increased usage -> have discounts on certain days, promotions when demand is low