ch 38

Question 1

What is the definition of Capacity Utilization?

Answer 1

the use that a business makes of its resources

Question 2

What is Excess or Surplus Capacity?

Answer 2

when a business has too many resources, such as labour and capital, to produce its desired level of output.

Question 3

What is Full Capacity?

Answer 3

the point where a business cannot produce any more output.

Question 4

What is Mothballing?

Answer 4

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

Question 5

What is Over-utilization?

Answer 5

the position where a business is running at full capacity and ‘straining’ resources.
stretching its resources

Question 6

What is Rationalization?

Answer 6

reducing the number of resources, particularly labour and capital, put into the production process, usually undertaken because a business has excess capacity.

Question 7

What is Under-utilization?

Answer 7

the position where a business is producing at less than full capacity.
not making use of all its resources

Question 8

What is Capacity Utilisation?

Answer 8

If a business is not able to increase output, it is said that they are running at full capacity, and its capital utilisation will be at 100%.
If a business is able to increase more output and use up more of it’s resources than it currently is, it is said to have excess, surplus or unused capacity.
Businesses aren’t all able to work at full capacity all of the time, so therefore they aim to operate as close to capacity as possible, at 90% for example.
In some cases businesses choose to operate at less than full capacity to make themselves more flexible.

Question 9

What are the implications of under-utilization?

Answer 9

A business may be under-utilising capacity if it has experienced a drop in demand, for example it may have lost customers to a market competitor.
Some businesses have to deal with seasonal demand where at certain times of year the demand is expected to be low.

Question 10

What are Drawbacks of Under-utilization?

Answer 10

-If a business is working with under-utilised capacity it will not be making the most of its resources.
-It may be working inefficiently because its unit costs are not minimised.
-Operating with too much spare capacity may also affect the morale of workers, this is because they may feel as if the business is struggling to generate orders and therefore this may make them feel insecure in their jobs.
-If workers become accustomed to a ‘light’ workload, they may resent working harder if the business suddenly gets more orders.

Question 11

What are the implications of over-utilization?

Answer 11

Many businesses prefer to operate as close to full capacity as possible as this means average costs will be lower.

However, if a business is running at full capacity it may be over-utilising its resources. This means that resources will be stretched uncomfortably.

Question 12

ad of under

Answer 12

can cope with sudden unexpected damad
less work-related stress and happier workers low turnover

Question 13

What is the benefits of over-utilization?

Answer 13

-Average costs will be lower because fixed costs will be spread across more units of output- this will help improve competitiveness and raise profits

-Staff motivation might be good of workers feel secure in their jobs

-Workers may be happier if there is lots of work available to do overtime to increase their earnings

-A busy operation can improve the company image therefore customers may feel more confident when placing orders

Question 14

What are the Drawbacks of over-utilization?

Answer 14

-Pressure of constant work at full capacity can strain some resources

-Causing stress and tiredness to the workforce, possible increasing risk of accidents or absence

-Machines may be overworked to breaking point If flow production is used, breakdowns on a production line can be very expensive, especially if production is stopped completely for a period of time

Business may not be able to respond to an increase in demand

-There may be insufficient time for staff training and important maintenance work

Question 15

What are ways of improving capacity utilization?

Answer 15

A business will look to improve capacity utilisation however they can. They will do this in one of three ways.
They may reduce capacity,
increase sales or
increase usage in order to improve their capacity utilisation.

Question 16

what are way of reducing capacity?

Answer 16

-A business may decide to cut capacity by rationalising. This is where the business reduces excess capacity by getting rid of resources that the business can do without.

This could be by:

-Reducing staff by making people redundant, employing more part time/temporary staff or offering early retirement

-Selling off unused fixed assets
Review leasing capacity E.g. leasing unused floor space of stores or factories

-Move to a smaller premises where costs are lower
-Mothball some resources. This is where fixed assets are left unused but are maintained so can be brought back into use at anytime

Question 17

how do you increases sales and what may the implication be?

Answer 17

If a business sells more output, it will have to produce more. Therefore capacity utilisation will rise. A business may need to spend money on promotion to increase sales, however if these costs are not covered by the extra revenue created then raising capacity utilisation in this way may not be viable.

Question 18

How do you increase usage of the business?

Answer 18

Businesses like this would like to increase capacity utilisation during off peak hours
like discounts
A busy operation could improve the business’ reputation and therefore customers may be more confident when placing orders.

Question 19

using outsourcing

Answer 19

if capital machinery is going relatively unused or is used very little but maintained for future use (mothballing) then it may be more efficient to outsource or sub-contract. Outsourcing refers to employing other businesses to complete work that was previously done in-house

it could potentially work out cheaper to hire other businesses to deliver the products for them, as opposed to maintaining vans that are used minimally. This can lead to other benefits for the business, such as the ability to spend less money if they employ full-time drivers who are under-utilised for long periods of the day.

Question 20

How is outsourcing an advantages to the business?

Answer 20

No need to employ staff who are under-utilised for long periods of the day, like the delivery van example.
Sub-contractors will have more knowledge of how to run their business – a delivery business will be better at delivering than one with little knowledge of how to operate effectively.
Outsourcing services that will be purchased in bulk or in multiples may offer the chance to negotiate lower prices than if just one unit was outsourced.

Question 21

How is redeployment used in business? underutilization

Answer 21

If a business has too many resources in one department, they may be able to deploy them into other parts. For example, a bank may ask a number of employees to work in another branch for a short period.

Question 22

how to improve overutilization

Answer 22

-incrase inventores
-rasing prices for a short time(this may reduce demand but it can also risky as customers may find a alternative and wont come back)
-outsorcing
-redeployment
-acquiring temporary use of resources
(part-time staff)
-expansion(if they are sure that it is a long term demand raise)