Ch 25 Capacity utilization (A Level) Flashcards
Define capacity utilisation
the proportion of maximum output capacity currently being achieved
(current output level/ maximum output level) x 100 = rate of capacity utilisation
Why is capacity utilisation an important concept?
It is often used as a measure of productive efficiency
Average production costs tend to fall as output rises – so higher utilisation can reduce unit costs, making a business more competitive
So firms usually aim to produce as close to full capacity (100% utilisation) as possible
Define excess capacity
exists when the current levels of demand are less than the full capacity of a business - also known as spare capacity
Define full capacity
when a business produces at maximum output
Advantages of operating at full capacity (3)
Its fixed costs per unit are at their lowest possible level.
The firm is assumed to be using all of its fixed assets effectively, therefore profits should be high
It will be perceived as a successful country both internally and externally leading to positive effects.
Internally, employees will feel a sense of pride working for such a successful organisation.
Externally, if customers know that a firm is working at full capacity it will assume that it is offering a good product.
Drawbacks of operating at full capacity (4)
Staff may feel under pressure due to workload
Machinery will be working flat out and there may not be sufficient time for maintenance => affects quality of the products
Increased capacity not yet match increased demand
If there is lower demand, there can be loss of sales
Advantages of operating at excess capacity
opposite of drawbacks of operating at full capacity
Disadvantages of operating at excess capacity
Higher average fixed costs
Opportunity costs
Inefficiency/unproductivity
Decreases profitability
Excess capacity - what are the options?
Short term:
maintain high output levels but add to stocks - could be expensive
adopt a more flexible production system allowing other goods to be made that might be sold at other times of the year
offer flexible employment contracts
Long term:
A cut in production capacity by cutting overheads to increase efficiency - rationalisation
research and development into new products
Define capacity shortage
when the demand for a business’ products exceed the production capacity
Full capacity - what are the options?
increase scale of operation by acquiring more production resources
outsourcing: using a thrid party to undertake part of the production process rather than doing it within the business using the firm’s own employees
Advantages of outsourcing (5)
Reduction and control of operating costs - specialist firms can be cheaper because they benefit from economies of scale
Increased flexibility - fixed costs are converted into variable costs, contracts can be cancelled if demand falls
Improved company focus
Access to quality services and resources => improved quality
Freed up internal resources
Disadvantages of outsourcing (3)
Loss of jobs within the business => decreased motivation and productivity
Quality issues - processes cannot be monitored by managers, specialist firms have other clients => won’t prioritise the firm => might have to send out quality assurance inspectors
Security - confidential information can leak
