24C : Capacity Utilisation

Question 1

What is capacity

Answer 1

• Is the maximum out put that can be produced in a given period

(Capacity utilization is now much capacity is being used)

(Capacity can also depend on the kind of production process, the amount of investment and technology the business has)

Question 2

How is capacity utilization calculated

Answer 2

Output
———————. x 100
Capacity

Example:

A hotel with half its rooms booked out has a capacity utilisation of 50%.
A clothing factory with output of 70,000 shirts per month and a maximum capacity of 100,000 shirts per month is running at 70% capacity utilisation
NB Capacity utilisation depends upon demand

Question 3

How does under utilization become inefficient and push costs up

Answer 3

• A low capacity utilization is called under-utilisation

• It is inefficient because the business is not getter use out of machines and facilities it has already paid for

• The fixed cost of the firm’s assets is spread over less output - which mean that unit costs go up. This reduces profit margins and make the product less profitable

Question 4

Why can 90% capacity utilization be better than 100% capacity utilization

Answer 4

• There is no downtime with 100%: machines are on all the time there is no time for maintenance

• If out put is greater than demand sentence ocbues waiting sold this is expensive

• There is no margin for error: everything has to be perfect the first time which can cause stress for managers

Question 5

What are the benefits of working at full capacity

Answer 5

• average cost minimized: fixed costs are spread - helps raise profits

• Workers may feel more secure in their jobs - motivation raised

• Improves company image - busy business may encourage customers to place orders