2.4.2 : Capacity Utilisation Flashcards
What is capacity ?
The capacity of a business is a measure of how much output it can achieve in a given period. It affects the the ability of a firm to match supply to demand. The maximum amount of output achievable if all resources are fully utilised. Capacity can change. Capacity needs to take account of seasonal or unexpected changes in demand.
What is capacity utilisation ?
The proportion of a business’ capacity that is actually being used over a specific period
What is the formula for capacity utilisation ?
Actual level of output / maximum level of output X 100
How do you utilise capacity efficiently ?
Under utilisation - increase demand - downside e.g. sell assets - lease of spare capacity
Over utilisation - reduce demand - outsource part of the business’ operations - increase capacity by investing in more resources
Why does capacity utilisation matter ?
It is a useful measure of production efficiency as it measures whether there are idle resources in the business
Average production costs tend to fall as output rises - so higher utilisation can reduce unit costs , making a business more competitive
Businesses usually aim to produce as close to full capacity as possible in order to minimise unit costs
A high level of capacity utilisation is required of a business has a high break-even output due to significant fixed costs
What are the problems working at high capacity ?
Negative effect on quality - production is rushed - less time for quality control - less time for quality control
Employees suffer - added workloads + stress - de-motivation if sustained too long
Loss of sales - less able to meet sudden demand
Why do most businesses operate at low capacity ?
Lower than expected market demand e.g. change in customer taste
A loss of market share - e.g. competitors gain customers
Seasonal variations in demand weather changes impact demand
Recent increase in capacity - e.g. a new production line has been added
Maintenance + repair programmes - e.g. capacity is temporarily unavailable
What are the dangers of operating at a low capacity utilisation ?
Higher costs units - impact on competitiveness
Less likely to reach break even output
Capital tied up in less utilised assets
Can a business work at 100% capacity ?
Can be possible in short-term
Have to increase workforce hours
Sub contract some production activities
Reduce time spent maintaining production equipment
