5.3.3 The impact of capacity utilization on unit costs

• What is capacity utilization defined as?

  Use of production capacity
• The formula for capacity utilization is Output divided by maximum possible output, multiplied by 100%.
• Higher capacity utilization generally leads to lower unit costs.
• How do fixed costs per unit change with higher capacity utilization?

  Reduce
• Fixed costs remain constant regardless of production volume.
• Higher capacity utilization spreads fixed costs across more units, reducing the cost per unit.
• What are the main effects of higher capacity utilization on variable costs?

  Economies of scale
• Higher capacity utilization always leads to lower overall costs for a business.
• Economies of scale occur when higher capacity utilization spreads fixed costs, leading to lower unit costs.
• Why do fixed costs per unit decrease with higher capacity utilization?

  Spread across output
• Variable costs per unit can decrease with higher capacity utilization due to bulk discounts.
• Arrange the following steps in order to calculate capacity utilization:

  1️⃣ Determine actual output

  2️⃣ Determine maximum possible output

  3️⃣ Divide actual output by maximum possible output

  4️⃣ Multiply by 100%
• What happens to the variable cost per car when production efficiency improves?

  Decreases from \$200 to \$190
• Capacity utilization is calculated as Actual Output divided by Maximum Possible Output
• Higher capacity utilization can lead to economies of scale in variable costs.
• What is the variable cost per unit at 90% capacity utilization?

  \$190
• Bulk discounts on materials contribute to lower variable costs per unit.
• Capacity utilization is calculated as Actual Output divided by Maximum Possible Output.
• Why does higher capacity utilization typically lead to lower unit costs?

  Fixed costs are spread
• At 50% capacity utilization, the cost per cake is \$200 if fixed costs are \$100,000.
• Higher capacity utilization always leads to lower unit costs.
• Fixed costs remain constant regardless of output levels.
• At 50% capacity utilization, the cost per unit is \$200 when fixed costs are \$100,000.
• Steps to calculate capacity utilization:

  1️⃣ Determine actual output

  2️⃣ Determine maximum possible output

  3️⃣ Divide actual output by maximum output

  4️⃣ Multiply by 100%
• What is the formula for capacity utilization?

  \text{Capacity Utilization} = \frac{\text{Actual Output}}{\text{Maximum Possible Output}} \times 100\%</latex>
• Higher capacity utilization can lead to lower unit costs due to economies of scale.
• At 50% capacity utilization, the cost per unit is \$200 when fixed costs are \$100,000.
• Higher capacity utilization generally leads to lower unit costs because fixed costs are spread over a larger output.
• Match the term with its effect on unit costs:

  Higher Capacity Utilization ↔️ Lower Unit Costs

  Bulk Discounts ↔️ Lower Variable Costs

  Fixed Costs ↔️ Constant Regardless of Output
• What is the definition of capacity utilization?

  Extent of resource use
• Higher capacity utilization leads to lower unit costs due to economies of scale.
• At 50% capacity utilization, the cost per unit is \$200 when fixed costs are \$100,000.
• Fixed costs remain constant regardless of production volume.
• At 50% capacity utilization, the cost per unit is \$200 when fixed costs are \$100,000.
• What is the relationship between higher capacity utilization and variable costs?

  Economies of scale
• Higher capacity utilization can lead to economies of scale in variable costs.
• Higher capacity utilization can lead to bulk discounts on raw materials, reducing variable costs.
• Higher capacity utilization can lead to economies of scale in variable costs through bulk discounts on raw materials
• Higher capacity utilization can lead to economies of scale in variable costs through optimized production processes
• Higher capacity utilization always results in lower variable costs per unit