2.4.2 - Capacity utilisation

• Define capacity utilisation:

  • is the extent to which the maximum capacity for output is being used or the current output expressed as a percentage of the maximum output.
• Capacity utilisation explained:

  • if a business cannot increase its output its at full capacity.
  • ex - a 295 seat plane if it’s full then it’s running at full capacity. If plane half full then running at 50% capacity.
  • capacity utilisation can lead to economies of scale.
• Ways of improving capacity utilisation:

  • a business could increase demand for the product through a price cut sale or through promotion on off-peak times.
  • business could make staff (recourses) redundant.
  • could sell assets (recourses) such as machinery.
  • the business could lease.
  • the business could move to smaller premises and rationalise.
  • business could balance seasonal demand production.
• Capacity utilisation formula:

  • current output/maximum output x 100
• difficulties of under-utilisation:

  • higher fixed costs per unit.
  • impact on brand image.
  • need to cut costs/prioritise task: redundancies, sales of assets, hiring temporary staff and reduction in overtime hours.
  • increases flexibility: accept non-standard orders, have time to train staff.
• Difficulties of over-utilisation:

  • can damage reputation of business.
  • in manufacturing it can put too much strain on recourses.
  • staff may do too much overtime and so have accidents when tired.
  • no time to maintain machinery/train staff.
  • Quality suffers as mistake.