2.4.2 - Capacity Utilisation

Question 1

what is capacity utilisation

Answer 1

• Capacity utilisation is the extent to which the maximum capacity for output that is being used – it is normally expressed as a % of maximum output e.g. 80%
• In any business there are decisions to be made about how best to use resources
• An operations manager will need to make daily decisions about how best to turn inputs such as machinery, labour and capital into outputs such as products and services
• Capacity utilisation is how best to use those resources for the benefit of the business
• If a business cannot increase its output it is at full capacity
• For example, a 295 seat plane if it is full then it is running at full capacity
• If the plane is half full then it is running at 50% capacity

Question 2

What happens in high capacity utilisation

Answer 2

• In high capacity utilisation the fixed costs are spread over more units of production

Question 3

What happens in low capacity utilisation

Answer 3

• In low capacity utilisation the fixed costs can be too high to stay in business or keep producing that product

Question 4

How would you improve capacity utilisation

Answer 4

• A business could increase demand for the product through a price cut sale or through promotion
• In order to increase usage at off peak times the business could offer special deals such as Meerkat Movies on Tuesdays and Wednesdays
• The business could make staff (resources) redundant
• The business could sell assets (resources)such as machinery
• The business could lease capacity out to other businesses
• The business could move to smaller premises and rationalise
• They could also increase sales (cut prices) or increase usage (Off peak travel)
• The business could balance seasonal demand production (produce Christmas tree decorations in August)

Question 5

What is the capacity utilisation formula

Answer 5

Current output
________________ x 100

Maximum output

Question 6

What is capacity

Answer 6

• Capacity is the maximum possible output of a business

Question 7

What is capacity under-utilisation

Answer 7

• Capacity Under-utilisation would mean that not all the tickets had been sold for a match

➢Higher fixed costs per unit
➢Unmotivated staff standing around, not busy ➢Impact on brand image (empty restaurant)
➢Business may need to rationalise
• Can mean redundancies
• Sale of assets
• Hiring temporary staff instead of full time permanent
• Reduction in overtime hours for workers
• Partial shutdown (see article)
✓Increases flexibility of business
• Able to accept a non-standard order
• Have time to maintain the machinery or update technology
• Have time to train staff

Question 8

What is capacity over-utilisation

Answer 8

• Capacity Over-utilisation would mean they had sold too many seats and some fans would not have anywhere to sit
• Can damage reputation of the business
• In manufacturing it can put too much strain on resources
• Staff may do too much overtime and so have accidents when tired
• Means there is no time to maintain machinery or train staff
• Quality suffers as mistakes are made in production