Theme 2 Topic 2 - Capacity Utilisation Flashcards
Define Capacity
The maximum possible level of output with the resources available
Define Capacity Utilisation
Measures how effectively a firm is using its capacity, as a percentage
Capacity Utilisation (%) =
Actual Output/Maximum Possible Output x 100
Define Under-Utilisation of Capacity
Where a firm’s actual output is below the maximum possible output
What are three causes of under-utilisation?
Poor quality leading to lack of demand, Seasonal demand, Changes in tastes or fashion
What are two advantages of spare capacity?
Able to deal with increases in demand, Can focus on providing good quality
What are two disadvantages of spare capacity?
Not making a maximum amount of sales/profit, Fixed costs remain the same despite lower output
What % capacity utilisation with a business aim for and why?
90% - allows some opportunity to maintain and repair equipment and respond to customer demand whilst keeping fixed costs spread efficiently
Define Capacity Shortage
Where there is not enough capacity to fulfil customer orders
In order to improve capacity utilisation a firm needs to…
… Match production closely to the level of demand
What are four ways of adjusting demand?
Decreasing price so that more people can afford it, Move online to be more accessible, Improve the quality of the products, Increase promotion
Define Rationalisation
A process of improving efficiency by cutting back on the scale of operations - reducing capacity
What are three ways to rationalise a business?
Decrease number of staff, Buy less resources/materials, Decrease operating hours
What are two ways to increase capacity?
Employ more staff, Increase operating hours
