Capacity

Question 1

What is capacity?

Answer 1

• the maximum output a business can produce in a given period w/ available resources
• measured in production units (unit/month)

Question 2

How can the level of capacity change?

Answer 2

• changing the available resources
• less or more workers (labour)
• less or more machines (capital)

Question 3

How do you calculate capacity?

Answer 3

• there is no clear way of calculating capacity

- 7 machines produce 40 units per hour, 8 hour day = (7x40)8 = 2,240

Question 4

Why is capacity important?

Answer 4

• capacity must at least match the level of demand for the product
• should be flexible to allow for change in demand
• capacity should be flexible to allow production for different products

Question 5

What is capacity utilisation?

Answer 5

• the percentage of the total capacity that is actually achieved in a given period
• actual level of output/maximum possible output x 100

Question 6

Why is capacity utilisation important?

Answer 6

• often used as a measure of efficiency
• unit costs tend to fall as more of a product is made, higher capacity utilisation can reduce costs
• firms aim to produce close to full capacity, 90% is satisfactory

Question 7

Why is there spare capacity?

Answer 7

•lower demand
- general reduction in market demand
- new competitors/products have entered the market
•increase in capacity not matched by demand
- new technology that can produce more than is needed
- business would like flexibility to increase future production
•Inefficiencies
- poor maintenance of machines, poor quality distribution
- these are a problem as business will have less competitive unit costs

Question 8

What are some advantages of spare capacity?

Answer 8

• room to repair and maintain machines
• can cover absences or holidays of staff
• less pressure on staff
• room to cope with increase in demand
• business can rationalise, reduce capacity to reduce code (cutting hours,redundancies etc)

Question 9

What are the disadvantages of spare capacity?

Answer 9

• workers not at full capacity, bored and unmotivated
• firms contribution to fixed costs is lower
• negative image of business (empty shops, no customers)

Question 10

What is excess demand?

Answer 10

• if capacity utilisation is 100%, likely to be excess demand
• opposite of spare capacity, this is where a business can not produce enough to meet demand

Question 11

What can a business do to act on excess demand?

Answer 11

• increase workforce hours (overtime, temporary workers)
• sub-contract some production activities (assembly of components)
• rent/buy more land/capital

Question 12

What are problems associated with working at High capacity?

Answer 12

• negative effect on quality
• rushed production
• less time for quality control
  •employees suffer
• added workloads and stress
• de-motivating if sustained for too long
  •Loss of sales
• less able to meet increase in demand - goes to competitors
• production equipment may require repair, have to reduce capacity to repair

Question 13

What are some other solutions to excess demand?

Answer 13

• raise prices by to maximise sales revenue
• when demand>supply, people are more willing to buy
• mighty also reduce demand to a level they can meet