Edexcel-Capacity utilisation 2.4* Flashcards
Capacity
Measure of how much output a business can achieve in a given period.
Capacity utilisation
Percentage of a businesses capacity that is actually being used over a specific period.
Capacity utilisation Formula
Actual level of output/ Maximum possible output x 100
Why capacity utilisation matters?
Measures if there are unused resources in the business
Reducing unit costs makes a business more competitive
In order to ensure a business can cover it’s break even output
Why most businesses operate below capacity?
Lower than expected market demand
Loss of market share
Seasonal variations in demand.
Dangers of operating at low capacity
Higher unit costs
Less likely to reach break even
Capital tied up in under utilised assets
Problems with under utilised assets
Wasted money
Problems with higher unit costs
suggest a business lacks competitiveness
Dangers of operating at high capacity
Negative effect on quality
Employees suffer
Less able to meet sudden increases in demand
How to increase capacity utilisation?
Use marketing strategies
Rationalisation
What marketing strategies can be used to increase capacity utilisation?
Price reductions
Promotion offers
New ways of distribution
Whats rationalisation?
Downsizing a business
How can a business rationalise?
Closing outlets
Selling assets
Why would a business rationalise?
To reduce the overall capacity so they can meet it more successfully.
How businesses cope with high capacity utilisation?
Outsourcing
Reduce demand
Expanding organisation
