2.4.2 Capital utilisation Flashcards
What is capacity in a business context?
Measure of output in a given period
Capacity refers to the maximum output a business can produce in a specific timeframe.
What does capacity utilisation measure?
Measure to which business assets are being used to produce output
It indicates how efficiently a business is using its resources.
How is current output calculated?
Maximum possible output x 100
This formula helps to determine the percentage of capacity being utilized.
What is under-utilisation of capacity?
Business is not making the most of its resources and is likely to have increased unit costs
This situation may lead to inefficient operations and higher costs per unit.
What is a benefit of under-utilisation of capacity?
+ Allows business to cope with surges in demand
+ Allows business to redeploy workers to other areas such as maintenance
These benefits help maintain operational flexibility.
What is over-utilisation of capacity?
- Fixed costs are spread over fewer units of output resulting in higher average costs
- Workers may be under-deployed leading to fears of redundancy
Over-utilisation can lead to increased operational risks and employee dissatisfaction.
What is a potential consequence of high capacity utilisation?
Business may not have the flexibility to respond to new orders
This can limit growth opportunities and responsiveness to market changes.
What is a benefit of having busy workers?
+ Likely to feel secure in their employment
+ Business is likely to be well thought of and attract customers willing to wait for products
Worker morale and customer perception can be positively impacted.
What is a challenge of improving capital utilisation?
+ Staff will be under a lot of pressure to produce high levels of output
+ Overworked staff may be inclined to leave increasing staff turnover
+ Machinery may be pushed to its limits and prone to breakdowns
These issues can disrupt production and increase costs.
What is outsourcing in the context of capital utilisation?
Subcontracting some tasks to outside businesses can increase the level of output but profit margins may be reduced
Outsourcing can enhance efficiency but may affect overall profitability.
What does increasing sales require?
More units to be produced but promotional spending may need to be increased
A strategic balance between production and marketing is essential.
What is redeployment in business?
Move underused resources to other parts of the business that require them
This can optimize resource utilization but may involve retraining and retooling costs.
Fill in the blank: Encouraging sales when demand is usually lower stabilises capacity utilisation but prices may need to be _______.
[lowered]
What does reducing capacity involve?
Sell fixed assets or reduced staffing levels to remove excess capacity
This approach can reduce costs but may limit flexibility to meet future demand.
