Capacity utilisation Flashcards
Define capacity utilisation
Capacity utilisation is how much capacity a business is using.
How do you work out capacity utilisation?
Capacity utilisation (%)= current output / maximum possible output x 100
What is capacity?
The maximum output an organisation can produce without buying any more fixed assets such as machinery or factory space
What is Under capacity utilisation?
When there is low capacity utilisation e.g. 60%
What is over capacity utilisation?
When there is high capacity utilisation e.g. 115%
What is the advantage of under capacity utilisation?
Easier to grow
What is the advantage of over capacity utilisation?
Opportunity for growth
What are the disadvantages of under capacity utilisation?
- Idle resources costing money but not being used
- Unit costs rise
What are the disadvantages of over capacity utilisation?
- Employees are overworked and unhappy
- Mistakes are more likely to occur causing unit costs to rise
What should businesses working near 100% capacity do?
Increase capacity
How can businesses decrease capacity/ utilise idle resources?
- Increase demand (by changing the demand mix- Price, Product, place or promotion)
- reduce capacity by closing down part of their facilities (rationalism/ downsizing)
- Reducing overtime
- Selling factories
- Making workers redundant
How can businesses increase capacity?
- Buy more assets such as machinery or facilities
- Employ staff
- Employ new workers on temporary contracts
- Outsource work
- Offer overtime pay to workers
- not replacing workers who retire (natural wastage)
