2.4.2 Capacity Utilisation

• Capacity - maximum output achievable when all resources are fully utilised.
• Capacity Utilisation = Actual Output / Maximum Capacity x 100
• Under-utilisation of capacity - resources not used efficiently causing high unit costs.
• Over-utilisation of capacity - workers work very hard to push sales but lower unit costs.
• Effects of under-utilising capacity:

  • Increased costs per unit
  • Negative brand image
  • Increased costs may be passed on to customers (higher prices)
• Effects of over-utilising capacity:

  • Increased labour costs
  • Increased mistakes in production
  • Inability to conduct maintenance
  • Inability to meet new orders
• Downsizing - reducing capacity to reduce costs.
• Full capacity - when a business can not produce any more output.
• Under utilisation - when a business is producing under full capacity.
• Over utilisation - when a business is running at full capacity and straining resources.