2.4.2 Capacity Utilisation

Question 1

What is capacity utilisation?

Answer 1

• Capacity utilisation is measure of the level to which a businesses assets are being used to produce output.
• Compares current output to maximum possible output a business can produce using all of its assets and is expressed as a percentage
• Capacity is a measure of output- often dynamic but also needs to be flexible

Question 2

What is the formula for capacity utilisation?

Answer 2

Current Output/
Maximum possible output X100

Question 3

What are the implications on a business for under-utilisation?

Answer 3

• If a business has low levels of capacity utilisation it will not be making the most of its resources and is likely to have increased unit costs- reducing competitveness
• Less likely to reach breakeven output where your fixed costs are covered
• Capital may be tied up in under utilised assets if your not using it- waste of shareholders money
• Workers may be under-deployed leading to fears of redundancy

Question 4

What are the possible benefits of a business working at under-utilisation?

Answer 4

• Operating under capacity provides business with flexibility
• The business can respond to sudden increases in demand

Question 5

What are the implications of a business being over-utilised/

Answer 5

• It may not have the flexibility to respond to new orders from customers (as alrdy working at full capacity)
• Staff will be under a lot of pressure to produce high levels of output
• Overworked staff may be inclined to leave increasing staff turnover
• Possible negative effect on quality- production is rushed, less time for quality control

Question 6

What are the possible benefits of a business being over-utilised?

Answer 6

• High capacity utilisation will minimise average total costs & increase business competitiveness
• A business that is busy is likely to be well thought-of & is likely to attract customers who are willing to wait for products to be delivered

Question 7

What ways are there to improve capacity utilisation?

Answer 7

• Increase sales
• Increase usage
• Outsourcing
• Reduce capacity
• Redeployment

Question 8

How can increasing sales improve capacity utilisation?

Answer 8

• Increased sales requires more units to be produced
• More units produced lower costs- + EOS
  (but promotional spending may need to be increased)

Question 9

How can outsourcing improve capacity utilisation?

Answer 9

• Subcontracting some tasks to do outside the business can increase the level of output

(but profit margins may be reduced)

Question 10

How can reducing capacity improve capacity utilisation?

Answer 10

• Reducing its overall capacity will improve the level of capacity utilisation

Capacity can be reduced by selling capital equipment or reducing staff numbers

(But flexibility to respond to increased demand is reduced)

Question 11

How can redeployment improve capacity utilisation?

Answer 11

Move underused resources to other parts of the business that require them