Capacity Utilisation

Question 1

What is capacity utilisation

Answer 1

Capacity utilisation is the extent to which the maximum capacity for output that is being used – it is normally expressed as a % of maximum output e.g. 80%

Question 2

Capacity utilisation explained

Answer 2

• In any business there are decisions to be made about how best to use resources
• An operations manager will need to make daily decisions about how best to turn inputs such as machinery, labour and capital into outputs such as products and services

Question 3

How to improve capacity utilisation

Answer 3

A business could increase demand for the product through a price cut sale or through promotion

The business could make staff (resources) redundant
• The business could sell assets (resources)such as machinery
• The business could lease capacity out to other businesses

Question 4

Improving capacity utilisation

Answer 4

The business could move to smaller premises and rationalise
• They could also increase sales (cut prices) or increase usage (Off peak travel)

Question 5

Capacity utilisation formula

Answer 5

Current output
________________ x 100
Maximum output

Question 6

Why would running at 80% be ok

Answer 6

• 100% capacity is often not possible. A bus that is not quite full or a cinema film that has spare seats.
• This means the business can be flexible and can provide some times a rush order for a particular client. Example an executive car company that rents out chauffeured cars. They have two cars spare not working but when a regular client rings up they are able to meet their order.

Question 7

Capacity

Answer 7

Capacity is the maximum possible output of a business
• Old Trafford the football ground of Manchester United has a maximum capacity of 75,731 people
• Capacity Under-utilisation would mean that not all the tickets had been sold for a match

Question 8

Implications of under utilisation

Answer 8

➢Higher fixed costs per unit
➢Unmotivated staff standing around, not busy ➢Impact on brand image (empty restaurant)
➢Business may need to rationalise
• Can mean redundancies
• Sale of assets
• Hiring temporary staff instead of full time permanent
• Reduction in overtime hours for workers
• Partial shutdown (see article)

Question 9

Implications of over utilisations

Answer 9

• Can damage reputation of the business
• In manufacturing it can put too much strain on resources
• Staff may do too much overtime and so have accidents when tired
• Means there is no time to maintain machinery or train staff
• Quality suffers as mistakes are made in production