2.4.2 Capacity Utilistation

• capacity - a measure of how much output a business can achieve in a given period (dynamic - changes depending on demand)
• capacity utilisation - the percentage of a business' capacity that is actually being used over a specific period
• Uses of capacity utilisation:

  • useful measure of productive efficiency
  • shows if there are idle resources in the business
  • high level of capacity utilisation is required if there is a high break even point
  • higher capacity = lower average costs
  • usually aim to be at 100%capacity utilisation to minimise costs
• Improving capacity utilisation:

  • promotion/reducing prices to increase demand
  • lease capacity to other businesses
  • have seasonal staff/make staff redundant
  • sell assets
  • increase sales/usage
• Working at a high capacity:

  Benefits:

  • lower unit costs - able to be more competitive
  • profit margins could increase
  • economies of scale

  Drawbacks:

  • can't meet surges in demand
  • workers may be over worked
  • rushed production can mean a lower quality product
• over-utilisation - working at 100% capacity all of the time