2.4.2 Capacity Utilisation

Question 1

Calculating capacity utilisation

Answer 1

• Capacity utilisation is a measure of the level to which businesses assets are being used to produce output
• It compares current output to the maximum possible output of business can produce using all of its assets and is expressed as a percentage
  Current output/maximum possible output X 100

Question 2

Implications of under and over utilisation of capacity

Answer 2

Underutilisation:
- if a business has a low level of capacity utilisation it will not be making the most of its resources and is likely to have increased unit costs
- Fixed cost of spread over a few units of output resulting in higher average total costs
- Workers may be under deployed leading to fears of redundancy

• Operating under capacity does provide a business with flexibility
  
  • There may be the opportunity to engage workers in maintenance tasks
  • The business can respond to sudden increases in demand

Question 3

Overutilisation:

Answer 3

• If a business is a high level of capacity utilisation, it may not have the flexibility to respond to new order from customers
  
  • Staff will be under a lot of pressure to produce high levels of output
  • Overworked staff may be inclined to leave increasing staff turnover
  • Machinery may be pushed to its limits and prone and breakdowns which disrupt production and increase cost
• High capacity utilisation minimise average total cost and increase the business competitiveness
  
  • If workers are busy, they are likely to feel secure in their employment
  • A business that is a bus as likely to be well photo is likely to attract customers who are willing to wait for products to be delivered

Question 4

Ways of improving capacity to utilisation

Answer 4

1. Increase sales.
   - Increased sales require more units to be produced
   - But promotional may need to be increased
2. Increase usage.
   - Encouraging sales when demand is usually lower stabilises capacity utilisation
   - But prices may need to be lowered
3. Outsourcing.
   - Subcontracting some tasks to outside businesses can increase the level of output
   - But profit margins may be reduced
4. Reduce capacity.
   - Self fixed assets or reduced staffing levels to remove excess capacity
   - Flexibility to respond to increase demand is now reduced
5. Re deployment.
   - Move on use resources to other parts of the business that require them
   - Retraining of staff and retooling costs may increase