Capacity and Capacity Utilisation

• What is capacity?

  The capacity of a business is a measure of how much output it can potentially achieve in a given time period
• Capacity utilisation refers to the percentage of actual production compared with maximum potential production.
• How do you calculate capacity utilisation?

  Capacity Utilisation = (Actual Output / Maximum Possible Output) x 100
• Capacity can change
• What is an example for when capacity can decrease?

  When a machine is having maintenance, capacity is reduced
• What is an example of when capacity can increase?

  Expansion and by working more production shifts, capacity can increase
• Capacity needs to take account seasonal or unexpected changes in demand
• What is an example of capacity needing to increase because of unexpected changes in demand?

  Ice-cream factories in the UK needed to quickly increase capacity during a heat wave
• Capacity utilisation is a useful measure of productive efficiency since it measures whether there are idle (unused) resources in the business
• Capacity ustilisation is a useful measure of what since it measures whether there are idle resources in the business?

  Productive efficiency
• Average production costs tend to fall as output rises - so higher utilisation can reduce unit costs, making a business more competitive
• Higher utilisation can reduce what, making a business more competitive?

  Unit costs
• A high level of capacity utilisation is required if a business has a high break-even output due to significant fixed costs of production
• What are some reasons that most businesses operate below full capacity?

  • Lower demand than expected
  • A loss of market share
  • Seasonal variations in demand
  • Maintenance and repair programmes
• What are the dangers of operating at a low capacity utilisation?

  • Higher unit costs - impact on competitiveness
  • Less likely to reach break-even output
  • Waste of capital in under-utilised assets
• What are the problems of working at high capacity?

  • Negative effect on quality (possibly)
  • Employees suffer
  • Loss of sales
• Why could there be a negative effect on quality when working at a high capacity?

  Production could be rushed and there is less time for quality control
• Why might employees suffer if the business is working at a high capacity?

  Added workloads and stress and de-motivation of staff if sustained for too long
• Why might there be loss of sales when working at a high capacity?

  Less able to meet sudden or unexpected increases in demand and production equipment may require repair
• How could a business increase capacity?

  • Invest in capital machinery
  • Invest in employees through training
  • Hire more employees
  • Change production practises to be more efficient