Capacity utilisation Flashcards
Define CAPACITY
Capacity is the maximum level of output a business can achieve in a given period of time.
How can capacity change?
- Machine having maintainence (reduced capacity)
- Staff working more shifts (increased capacity)
Define CAPACITY UTILISATON
Capacity utilisation is the percentage of a business’ capacity that is actually being used over a specific period.
How is capacity utilisation calculated?
Capacity utilisation = (actual output/total possible output) x 100
Define UNDER UTILISATION OF CAPACITY
Under utilisation of capacity means that the business has low levels of capacity utilisation e.g. around 35%. It is caused by new competitors, changing trends in the market, unsuccessful marketing or seasonal demand.
What are the positive effects of under utilisation of capacity?
- Firm is able to meet sudden increases in demand
- More time for maintainence
- More time for staff training
What are the negative effects of under utilisation of capacity?
- Higher unit costs
- Lower profit margins
- Staff motivation may fall
- Negative brand image
What are the solutions for under utilisation of capacity?
- Do nothing
- Increase marketing activity
- Cut capacity
- Subcontract
Define OVER UTILISATION OF CAPACITY
Over utilisation of capacity is when the business has high levels of capacity utilisation e.g. 99 or 100%. It is caused by changing tastes in the market, successful marketing or seasonal factors.
What are the positive effects of over utilisation of capacity?
- Lower unit costs
- Improved profitability
- Increased job security and staff morale
What are the negative effects of over utilisation of capacity?
- Extra stress on staff may lead to mistakes
- Overtime costs may be high
- The business will be unable to meet additional customer orders
- There us not enough time for maintainence or staff training.
What are the solutions for over utilisation of capacity?
- Do nothing
- Expand capacity
- Subcontract
- Increase price
