2.4.2 Capacity Utilisation

Question 1

capacity utlisation

Answer 1

the proportion of maximum capacity being used by the business

Question 2

equation of capacity utilisation

Answer 2

current actual output / maximum potential output x100

Question 3

implications of under-utilisation of capacity

Answer 3

-high unit costs
-wasting fixed costs and resources
-wasting employee potential which can lead to low morale and staff may question their job security

Question 4

reasons for under-utilising capacity

Answer 4

having spare capacity helps to manage surprise orders or fluctuations in demand
also maintenance of repair may be occurring which means some capacity is temporarily unavailable

Question 5

implications of over-utilising capacity

Answer 5

quality may be sacrificed and reduced, as more mistakes may be made increasing unit costs. this also reduces customer loyalty and the brand’s reputation if products are not up to the expected standards
workers may feel over-worked and this can lead to burnouts or high labour turnover rates

Question 6

give the two ways to improve capacity utilisation

Answer 6

increase current output
reduce maximum capacity

Question 7

increasing current output to improve capacity utilisation

Answer 7

using marketing methods to boost the volume of sales made by the business through advertising, or reducing the selling price
also the business could use its capacity to make products for other businesses looking to subcontract work

Question 8

reducing maximum capacity to improve capacity utilisation

Answer 8

this will involve selling off assets or laying off staff, however, redundancies can be costly in the short-term.
reducing maximum capacity reduces fixed costs