2.3.2 Capacity utilisation

Question 1

What is capacity utilisation

Answer 1

Is the extent to which the productive capacity of a business is used.

( It is the percentage of total capacity which is being achieved.)

Question 2

How is capacity utilisation calculated

Answer 2

Actual level of output/ Maximum possible output X 100

Question 3

What does it mean if a business is operating at a higher capacity

Answer 3

1. Average costs of production fall, and this could result in the firm becoming more competitive.
2. This encourages firms to operate as close to full capacity as possible.

Question 4

When is a firm operating at full capacity

Answer 4

When all resources available are being used to their maximum potential.

Question 5

What are 2 factors that can increase the maximum capacity of a firm

Answer 5

1. Advancements in Technology
2. Increases in the level of investment

Question 6

Reasons why a firm might operate at below maximum capacity

Answer 6

1. A lower level of demand
2. Inefficiency
3. The maximum capacity has increased

Question 7

Disadvantages of Operating at full (or near to) capacity

Answer 7

1. Quality is affected
2. Employees become demotivated
3. Removes its ability to quickly respond to changes in demand.

Question 8

Reasons why a firm might operate at under- utilised capacity

Answer 8

1. More flexibility to change its level of output as and when it is needed, & the firm has time to fix machines without stopping production.

Question 9

Disadvantages of operating at under- utilised capacity

Answer 9

1. Fixed costs are divided by a lower level of output.
2. As a result, average fixed costs per unit of output increase, so profitability falls and prices might increase.
3. Firms then become less competitive.

Question 10

How can a firm improve it’s capacity utilisation

Answer 10

1. Entering new market
2. Expanding the range of products
3. Using promotions to increase demand.