(PAPER 2) 2.4.2 capacity utilisation

Question 1

capacity definition

Answer 1

the total or maximum amount a business can produce in a given time, without buying any more fixed assets; e.g machinery, factory, or space.

Question 2

capacity depends on…

Answer 2

• the number of employees and how skilled they are

- the technology that a business has and what state it is in

Question 3

capacity utilisation formula

Answer 3

actual output/ maximum possible output x100

a higher & is better as this would indicate that the business is more productively efficient i.e. making better use of its resources

Question 4

implications of under-utilisation

Answer 4

Under-utilisation is inefficient because a business will have excess capacity, such as machines,
sitting around producing no profit. Fixed costs have to be spread over fewer units of output, so unit costs increase which may mean a firm needs to increase prices.- this could make them less competitive= reduce sales and profit

Under-utilisation can lead to a negative brand image, especially in the service sector. For example, empty shelves in a supermarket and empty tables at a restaurant would give customers a negative impression of these businesses.

could reduce employee motivation as there may be long periods when there is not enough
work for staff to do. Staff may even fear that their job is not secure if there is no work for them to do.

Question 5

reasons why businesses could suffer from under-utilisation

Answer 5

• low demand
• inefficient production
• because the introduction of new technology to increase capacity has not yet been matched by an increase in demand.

Question 6

benefits of under-utilisation

Answer 6

the firm may be able to accept new orders, e.g. from increases due to seasonal demand. This makes it easier for the business to grow.

organising machine maintenance and staff training could be easier as it can be done at times when there are no current orders for products. Finally, sickness and absenteeism may be lower as workers and managers will be more relaxed and comfortable with their workloads.

Question 7

implications of over-utilisation

Answer 7

Unit costs will be lower because the fixed costs of machinery can be spread over the higher output. The ideal level of capacity is around 90%. Over-utilisation, or operating at full capacity, isn’t ideal by any stretch.

Businesses may have to turn away potential customers if it can’t increase output, potentially creating business for rivals and causing the business to lose sales and market share

business may not be able to increase output for spikes in seasonal demand. Alternatively, if output is greater than demand, the business will have surplus stock and may struggle to sell their products.

Although unit costs tend to be lower with higher capacity-utilisation, over-utilised firms actually risk increasing unit costs. For example, over-worked and unhappy workers could make mistakes, causing quality to suffer, so tasks may need to be repeated. An over-utilised business may also need to pay overtime to staff in order to allow the factory to run above its maximum potential capacity.

Question 8

benefits of over-utilisation

Answer 8

a business that is operating at full capacity may create the perception that it is popular, encouraging customers to place orders with them. Employees may also feel happier if there is lots of work with opportunities to increase their earnings by doing overtime.

Question 9

ways of improving capacity utilisation

Answer 9

excess capacity:
- Change the marketing mix, e.g., change the
price, promotion or distribution of the product.
- Launch new products.
- Find alternative uses for plant, e.g., accept
outsourced work from other firms.
- Stop overtime or reduce the length of the
working week.
- Allocate staff to other work in the business.
- In the long term, do not replace staff as they
retire, or make staff redundant.
- Move to a smaller premise where costs are
lower.

lack of capacity:
- Use facilities for more of the working week, e.g. have staff working in two or three shifts in a
day, and on weekends and bank holidays.
- Employ temporary or part-time staff in the
short-term, or get staff to work overtime.
- Increase staff levels in the long-term by
recruiting new permanent staff.
- Increase productivity, e.g., increase motivation
or reorganise production.
- Outsource work to other businesses in busy
periods.
- Reduce demand, e.g., by dynamic pricing.