4.2b - Capacity Flashcards
1
Q
Capacity definition
A
The maximum output that a business can produce in a given period
2
Q
What does capacity depend on?
A
- Number of employees
- Skill level of employees
- Technology available
- Kind of production process used
- Investment
3
Q
Capacity utilisation definition
A
The percentage of total capacity that is being achieved
4
Q
Under-utilised / spare capacity definition
A
When output it too little
5
Q
How can a business deal with under-utilised capacity?
A
- Stimulate demand by lowering price
- Fill capacity by outsourcing for other firms
- Close part of production facilities to reduce capacity
- Reduce capacity by stopping overtime
6
Q
Capacity shortage definition
A
When output is too much
7
Q
Capacity utilisation formula
A
(Actual level of output / maximum level of output) X 100
8
Q
Advantages of operating below max output:
A
- More time for maintenance and repair
- Less pressure
- Cope better with sudden increase in demand
- Maintain quality
9
Q
Disadvantages of operating below max output:
A
- Higher proportion of fixed costs per unit
- Lower profit
- Employees become demoralised
10
Q
What situation would cause a business to operate below max output:
A
- New competitors
- New product entering the market
- Fall in demand
- Seasonal demand
- Merger
11
Q
Disadvantages of working at high capacity:
A
- Adverse effect on quality
- Added workload and stress
- Loss of sales as less able to meet sudden increases in demand
12
Q
How can capacity be increased?
A
- Build or extend factories
- Encourage overtime
- Hire new staff
- Outsourcing
