2.4.2. Capacity Utilisation

Question 1

Capacity utilisation

Answer 1

Proportion of max capacity used by business. As %
Capacity utilisation= current output/ max possible output X100

Question 2

Implications of under utilisation of capacity

Answer 2

-Greater amount of rev. generated by each product must be used to cover fixed costs. Reduces operating Margins.
-Leads to fear for job security among staff, damaging motivation.
-Causes poor morale among managers
-Contributes to poor reputation

Question 3

Implications of over utilisation of capacity

Answer 3

-Firm may be unable to accept new orders, potentially turning new customers to rivals
-Little or no time to carry out maintenance on machines or to train staff

Question 4

Ways to improve capacity utilisation

Answer 4

1.Increase current output- use marketing methods to boost vol. of sales by advertising or cutting selling price.
2.Reduce max. Capacity-selling of assets or laying of staff. Redundancies can be costly in short term but reducing max capacity reduces fixed costs