2.4.2 Capacity utilisation

Question 1

What is the formula for capacity utilisation?

Answer 1

capacity utilisation = (current output/ maximum possible output) x100

Question 2

What is under-utilising?

Answer 2

Not making the most of the machinery/ workforce/ equipment available to it

Question 3

What is over-utilising?

Answer 3

Where a business runs at more than 100 per cent of its available capacity

Question 4

What is a positive of under-utilisation?

Answer 4

Time to do necessary maintenance and respond to sudden spikes in demand

Question 5

What is are 2 positives of over-utilisation?

Answer 5

Create maximum sales(is quality high enough)
Profit —> can be reinvested to purchase more capacity so business can better meet demand

Question 6

What is are 2 positives of over-utilisation?

Answer 6

Create maximum sales(is quality high enough)
Profit —> can be reinvested to purchase more capacity so business can better meet demand

Question 7

How do firms use capacity utilisation?

Answer 7

To show their actual output and how it compares to the maximum possible output they could produce

Question 8

What % capacity utilisation do businesses tend to be aiming for?

Answer 8

90% - room for maintenance

Question 9

Give 3 problems with over-utilising

Answer 9

• Inability to perform maintenance on machinery so loss of production during repairs
• Breakdown of machinery/ tiredness of staff affecting quality
• Need for staff overtime - raises costs

Question 10

Give 4 problems with under-utilising

Answer 10

• Increased cost per unit —> likely to lead to higher prices
• Negative image
• Unmotivated staff
• Causes the need for rationalisation

Question 11

What is rationalisation (4 examples)

Answer 11

Redundancies
Reduces hours
Sale of assets
Partial shutdown

Question 12

How can a business improve their capacity utilisation? (5)

Answer 12

1. Estimate long-term levels of sales
2. Create more demand
3. Increase understanding of consumers
4. Sale of assets
5. Employ more/ fewer staff

Question 13

Explain why businesses should estimate long-term levels of sales to improve capacity utilisation

Answer 13

Helps them prepare for surges + drops in demand so it’s always working as close to necessary capacity as possible

Question 14

Explain how businesses can create more demand to improve capacity utilisation

Answer 14

Through promotion + brand strengthening

Question 15

Explain why businesses should employ more/ fewer staff to improve capacity utilisation

Answer 15

Capacity includes staff. May consider redundancies if there are more employees than consumer demand requires, or employ more staff to run machinery and manufacture goods

Question 16

Explain why businesses should increase their understanding of consumers to improve their capacity utilisation

Answer 16

(Through primary + secondary market research)
The more a business learns about its customers, the better it can organise its capacity to ensure demand is met

Question 17

Explain why selling assets may improve a businesses capacity utilisation

Answer 17

If businesses continually unable to use its entire capacity, may sell some - money reinvested in promotion