Capacity Utilisation Flashcards
What is capacity utilisation?
the use that the business makes of its resources.
How do you calculate capacity utilisation?
Current output/max possible output x 100
What is Full Capacity?
the point where a business cannot produce any more output.
What is Excess or Surplus Capacity?
when a business has too many resources, such as labour and capital, to produce its desired level of output.
What is Over-utilization?
the position where a business is running at full capacity and ‘straining’ resources.
What is Under-utilization?
the position where a business is producing at less than full capacity.
What are the implications of under-utilization?
- A business may be under-utilising capacity if it has experienced a drop in demand, for example it may have lost customers to a market competitor.
-Some businesses have to deal with seasonal demand where at certain times of year the demand is expected to be low.
What are the drawbacks of under utilization?
-Not making most of resources eg unit costs not minimised so more expensive when less units sold
-Affect moral of workers eg insecure in their jobs as business is struggling to generate orders and may feel accustomed to light work so when more orders come they wont be used to it
What are the benefits of under utilization?
-Easily cope with sudden rise in demand eg customers will go to rivals if business doens meet their needs with demand fluctuations
-Less work related stress so less absents
What are the drawbacks of over utilization?
-put strain on resources=causing stress on workforce increase absents, machines overworked
-if flow production then machines breaks can affect the whole process=expensive
-may not be able to respond to an increase in demand
-insufficient time for staff training and maintenance eg short term cheap but long term effects eg machine breaks and inefficient customer service
What are the benefits of over utilization?
-Average costs because fixed costs will be spread over more units of output=improve competitiveness and raise profits
-Staff motivation as secure in job
-Staff happier as more work to do=increase overtime opportunities for more money
-Busy operation improves business image=customer feel confident placing orders
What are ways of improving capacity utilization?
1.reduce capacity
2.increase sales
3.increase usage
4.outsourcing
5.redeployment
What are ways to reduce capacity/ rationalise?
-Reduce staff eg redundancy, employing more part time and temp, offer early retirement
-Sell of unused fixed assets
-Review leasing capacity + space can be reclaimed when demand increases
-Move to smaller premises=reduce costs
-Montball some resources
How could you increase sales?
eg promo
