Capacity Utilisation

Question 1

How do you calculate capacity utilisation?

Answer 1

CU = (current output~max output) x 100

Question 2

Implications of under-utilisation

Answer 2

• drop in demand, due to increased competition in the market. E.g. seasonal demand

Question 3

Drawbacks of under-utilisation

Answer 3

• of a business is working with under-utilised capacity it will not be making the most of its resources. May be operating inefficiently because it’s unit costs are not minimised.
• affect morale of workers. May feel Business is struggling to generate orders. This might mean workers feel insecure in their jobs.
• of workers become accustomed to a light workload they may resent working harder if the business gets more orders.

Question 4

Benefits of under-utilisation

Answer 4

• the business may be able to cope more easily with sudden increases in demand.
• a business that is not able to meet immediate customer needs may lose out in the long term. Customers might go to rivals that are able to deal with demand fluctuations.
• less work related stress. Reduce sickness and absenteeism.

Question 5

Implications of over-utilisation

Answer 5

• prefer to operate close to full capacity bc average costs are lower. However, if a business is running at full capacity it might be over utilising it’s resources. This means that resources will be streatched uncomfortably.
  E.g. people are being asked to work long periods of overtime without reasonable break for rest.

Question 6

Drawbacks of over-utilisation

Answer 6

• stress and tiredness to a workforce.
• possibly increasing risk of accidents.
• machines may also be overworked to breaking point.
• if a business is using flow production techniques, breakdowns on a production line can be expensive - if production is stopped for a long period.
• businesses may not be able to respond to an increase in demand.
• insufficient time for staff training and important maintenance work this might save money in the short term but in the long term staff may be lacking vital skills.

Question 7

Benefits of over-utilisation

Answer 7

• average costs will be lower bc fixed costs will be spread across more units of output. This will help I’m probs competitiveness and raise profits.
• staff motivation might be good if workers feel secure (Maslow)

Question 8

Ways of improving Capital Utilisation

Answer 8

1) reduce capacity: a business may decide to rationalise. By reducing excess capacity by getting rid of resources that the business can do without.
- reduce staff, redundant, employing more part time and temporary staffs and offering early retirement.
- sell of unused assets, machinery, vehicles, warehouses.
- mothball some resources, left unused but maintained so they can be brought back into use if necessary.
2) increase sales: sell more output, produce more. CU will rise. May need to spend on promotion. However, if these costs are not covered by the extra revenue generated, raising capacity utilisation in this way might not be viable.
3) increase usage: increase CU during off-peak hours. E.g discounts for off peak hours (travel)