Capacity Utilisation Management

Question 1

What is capacity?

Answer 1

The max total level of output or production that a business can produce in a given time period. 100% is full capacity

Question 2

What is capacity utilisation?

Answer 2

The % of a firms total possible production level that is being reached

Question 3

What is under utilisation of capacity?

Answer 3

When the firm’s output is below the max possible = excess capacity. Represents a waste of resources, means funds are unnecessarily spent of fixed assets.

Question 4

What is a capacity shortage?

Answer 4

When a firm’s capacity is not large enough to deal with the level of demand for products. Customers may be disappointed

Question 5

What is the formula for CU?

Answer 5

CU (%) = actual putput per time period / max possible output per time period x 100

Question 6

What is a sensible target of CU?

Answer 6

90%

Question 7

What does capacity utilisation management involve?

Answer 7

Trying to get the most effective and efficient usage from the present capacity and anticipating and planning future capacity requirements

Question 8

What causes spare capacity?

Answer 8

• Seasonal demand
• A recession if the good is a normal good
• Over investment in NCA
• Not enough staff
• Competition
• Legislation
• Trends
• Poor marketing

Question 9

How can full capacity be reached?

Answer 9

• Increasing marketing to boost demand
• Lowering price (good if price inelastic)
• Rationalisation

Question 10

What is rationalisation?

Answer 10

Improving efficiency by cutting the scale of OPs

• Selling off production space
• Changing to a shorter week/day
• Laying off workers

Question 11

Advantages of spare capacity:

Answer 11

• More time for maintanance and repair of machinery, for training and for improving existing systems
• Less pressure/stress for employees who may become overworked at full capacity
• Can cope with a sudden increase in demand

Question 12

Disadvantages of spare capacity:

Answer 12

• Higher proportion of fixed costs per unit
• Potentially lower profits due to higher unit cost, may need to increase price
• Negative image - unsuccessful
• Demotivating/boring for employees, less efficient

Question 13

How can a firm cope with a capacity shortage?

Answer 13

• Build/extend factories
• Ask staff to work overtime/extra hours
• Employ more staff (temp or part time)
• Hire new full time staff
• Subcontract