2.4.2 Capacity Utilisation

• Capacity


  The maximum output a business can produce in a period with its available resources
• Capacity Utilisation Formula

  Current output/ Maximum possible output * 100
• Factors Determining Capacity

  Number of buildings, machinery and labour available (service industries can hire temporary and part-time workers)
• Ways to Increase Capacity Utilisation

  Increase workforce hours, outsource production to other firms and reduce machine maintenance
• Ways to Improve Capacity Utilisation

  Competitors leaving the market increases demand for goods, successful marketing strategy and can use rationalisation (hire more workers during busy hours)
• Ways to Improve Capacity Utilisation: Increase Demand

  Extra promotional spending, price cutting or making a new strategy to reposition the products into growth markets and to double sales they need to launch new products this requires investment and long-term planning but is highly effective
• Ways to Improve Capacity Utilisation: Cut Capacity

  Firms can reduce their workers’ hours this helps to avoid the disruption of moving to a smaller building and moving premises reduces all costs but reduces the firm’s flexibility in demand
• Under-utilisation of Capacity

  Increased flexibility, lower output means the costs per unit are much higher, loss of market share, the ideal capacity utilisation is approximately 90%
• Over-utilisation of Capacity

  Operating at maximum capacity means if demand increases the firm cannot supply more, the firm will struggle to service machinery and train staff which can be costly and increase short-term production breakdowns and unhappy staff due to high pressure  leads to high turnover rates
• Rationalisation


  The reorganisation of a business to increase its operating efficiency
• Capacity Utilisation


  The extent to which a firm is using its productive capacity