Capacity Utilization (2.4.2)

Question 1

What is Capacity utilization?

Answer 1

A measure of the level to which a business assets are being used to produce output. If a business is running at full capacity its capacity utilization will be 100%. It compares current output to the maximum possible output as a percentage

Question 2

What is the percentage that capacity utilization wants to be at? Why?

Answer 2

85%-90% so the business can take additional orders if demand increases suddenly.

Question 3

What’s the equation for Capacity Utilization?

Answer 3

Capacity Utilization= (Current Output/ Maximum Possible Output) x100

Question 4

What are the ways in which you can improve Capacity utilization?

Answer 4

-Reduce Capacity
-Increase Sales (Various Methods)
-More consistent orders
-Outsourcing idle departments
-Redeploying Idle Staff

Question 5

What happens when working at full capacity? (Costs, Staff) (Over-Utilisation of Capacity)

Answer 5

Means a business doesn’t have the flexibility to respond to new orders for customers.
- Staff will be under a lot of pressure to produce high levels of output
-Overworked staff may be inclined to leave increasing staff turnover
-Machinery may be pushed to its limits and prone to breakdowns which disrupts production and increase costs

However…
This allows workers to feel secure in their employment as they are so busy in their work

Question 6

What happens when working below full capacity? (Under-Utilisation of Capacity)

Answer 6

Means as business will not be making the most of its resources and is likely to have increased fixed costs.
-Fixed Costs are spread over fewer units of output resulting in higher average total costs
-Workers may be under-deployed leading to fears of redundancy

However…
It does allow a business to have more flexibility and so the business can respond to sudden increases in demand