2.4.2 Capacity Utilisation

Question 1

Capacity

Answer 1

Measures the maximum amount of output a firm can produce at a given moment with its existing resources.

Question 2

Capacity Utilisation

Answer 2

Measures the existing output relative to the maximum output.

Question 3

Capacity Utilisation Formula

Answer 3

(Current output/Maximum output) x 100

Question 4

Why is capacity utilisation important

Answer 4

• If capacity utilisation is high businesses can spread fixed costs over more units (lower average costs and greater economies of scale).
• Higher chance of reaching break even output.
• If capacity utilisation is low business is inefficient as resources are not being used effectively.

Question 5

Is 100% capacity utilisation desirable?

Answer 5

• Negative effect on quality – production is rushed, less time for quality control.
• Workers and machines stressed – increased absenteeism, staff turnover and maintenance costs.
• No scope to increase capacity if needed.
• No time for maintenance or training of workers.

Question 6

Why most businesses operate below capacity?

Answer 6

• Lower than expected demand.
• Loss of market share.
• Seasonal variations in demand.
• Recent increase in capacity – new production line.
• Maintenance and repair programmes – capacity is temporarily unavailable.

Question 7

Options for low capacity utilisation?

Answer 7

• Do nothing.
• Renew marketing activities.
• Reduce level of capacity.

Question 8

Options for high capacity utilisation?

Answer 8

• Do nothing.
• Expand capacity.
• Increase price.
• Subcontract (offer work to other companies).