CAPACITY UTILISATION (paper 3)

Question 1

What’s capacity of an organisation

Answer 1

The maximum output a business can produce in a given period without buying anymore fixed assets (machinery, factory, space etc)

Question 2

What does capacity depend upon

Answer 2

• Number of employees and how skilled they are
• What technology the business has
• Kind of production process used
• Amount of investment in the business

Question 3

What’s capacity utilisation

The formula (%)

Answer 3

How much capacity a business is using

Current output / maximum possible output X100

Question 4

Increasing utilisation too much can lead to over-utilisation

What is over-utilisation

Answer 4

When a business operates at 100% capacity utilisation

Question 5

What’s the drawbacks of operating at 100% capacity utilisation

Answer 5

• Hard to operate at 100% capacity utilisation, and keep quality levels high
• May have to turn away customers as it can’t increase output anymore
• No downtime- machines are on all the time. If a machine breaks, work piles up waiting for it to be fixed. Also, no time for maintenance, which can reduce life of machinery
• Can’t temporarily increase output for seasonal demand

Question 6

Firms with over-utilisation (100% capacity utilisation) can Increase their capacity by doing what

Answer 6

• Buy more machines
• Employ More staff, or get staff to work overtime
• Can outsource their work to other businesses during busy periods. Meaning they can meet unexpected increases in demand without increasing their own capacity and having the costs of extra staff and facilities all year round

Question 7

What’s low capacity utilisation called

Answer 7

Under-utilisation

Question 8

Why’s under utilisation inefficient

Answer 8

Because it means a business is not getting good use out of machines and facilities that have been paid for

Question 9

Why might unit costs increase due to under-utilisation

Answer 9

Because fixed costs have to be spread over fewer units of output, so unit costs increase. Could result in increase in prices, meaning less competitive, resulting in reduced sales and profit

Question 10

Why might staff motivation decrease due to under-utilisation

Answer 10

May be long periods when there’s not enough work for them to do. There’d be less need for supervisory roles compared to if capacity utilisation was higher, meaning less opportunity for promotion, which could also reduce motivation

Question 11

What’s 2 benefits of under-utilisation

Answer 11

• Firm may be able to accept new orders. E.g. from increases due to seasonal demand
• Organising machine maintenance and staff training could be easier

Question 12

What’s the 2 ways a business deals with under-utilisation

Answer 12

Either:

1) Increase demand
2) Reduce capacity

Question 13

How can a business increase demand to try fix under-utilisation

Answer 13

• Changing their marketing mix. E.g. change the promotion of the product or change its price or its distribution

Question 14

What can a business do to its capacity to reduce under-utilisation

Answer 14

• Fill spare capacity by accepting outsourced work from other firms. Better to make goods for a competitor and make money than it is to leave machinery doing nothing
• If a business can’t increase demand, may have to close part of production facilities to reduce capacity. This is called rationalising (or downsizing)
• Businesses can reduce capacity in short term by stopping overtime or reducing length of working week
• Businesses can reduce capacity in long term by not replacing retired staff, making staff redundant and by selling off factories and equipment

Question 15

The key to long term success is planning capacity changes to match long term changes in demand

How can this be done

Answer 15

Use market research to help predict future demand, however it’s not 100% certain