Capacity utilisation

Question 1

Define capacity utilisation.

Answer 1

Capacity utilisation is the use that a business makes of its resources. It is normally expressed as a % of maximum output.

Question 2

What is the formula for capacity utlisation?

Answer 2

C.U.= (Current output/ maximum possible output) x 100

Question 3

Explain resources and capacity utilisation.

Answer 3

In any business there are decisions to be made about how best to deploy resources.

An operations manager will need to make daily decisions about how best to turn inputs such as machinery, labour and capital into outputs.

Capacity utilisation is how best to use those resources for the benefit of the business

Question 4

Explain economies of scale adn capacity utilisation.

Answer 4

Capacity utilisation is important as it has a bearing on average cost per unit and therefore EOS

High capacity utilisation: Fixed costs are spread over more units of production

Low capacity utilisation: fixed costs can be too high to stay in business or keep producing that product.

Question 5

What is capacity under-utilisation?

Answer 5

When a company is working below full capacity. This may be strategic- e.g. having extra in case needed

Question 6

What is capacity over-utilisation?

Answer 6

When a company is working above maximum capacity- e.g. when flight tickets are oversold and all passengers show up for their flight.

Question 7

What are the implications of under-utilisation?

Answer 7

Higher fixed costs per unit

Unmotivated staff standing around, not busy

Impact on brand image (e.g. empty restaurant)

Business may need to rationalise:
- Can mean redundancies
Sale of assets
-Hiring temporary staff instead of full time permanent ones
-Reduction in overtime hours for workers
-Partial shutdown 

+ Increases flexibility of business:

• Able to accept a non-standard order
• Have time to maintain the machinery or update technology
• Have time to train staff

Question 8

What are the implications of over-utilisation?

Answer 8

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

+ Average costs will be lower because fixed costs will be spread across more units of output, improves competitiveness and profits.

+ staff motivation good if workers feel secure in their jobs; happier if there is lots of work, opportunities to increase earnings by doing overtime.

+ a busy operation can improve the company’s image, customers more confident

Question 9

How could a business improve capacity utilisation?

Answer 9

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

B) In order to increase usage at off peak times the business could offer special deals such as Meerkat Movies on Tuesdays and Wednesdays.

C) The business could make staff (resources) redundant

D) The business could sell assets (resources)such as machinery

E) The business could lease capacity out to other businesses

F) The business could move to smaller premises and rationalise

G) They could also increase sales (cut prices) or increase usage (Off peak travel)

H) The business could balance seasonal demand production (produce Christmas tree decorations in August)

Question 10

Define the term mothballing.

Answer 10

Leaving machines, equipment or building space unused but maintained so they could be brought back if necessary.