2.4.2 Capacity Utilisation

Capacity utilisation

🔗 A business' output level as a percentage of the business's maximum capacity over a given period of time

Aims to use factors of production efficiently

Factors of production = Raw materials, workers, machinery/capital, entrepreneur

Formula

$$Current~output/Maximum~possible~ output~X~100$$

Why under-utilisation is bad

• Waste of resources, lower efficiency, unit costs are increased as fixed costs are spread over a lower level of output, profit margins are reduced
• Not producing at maximum capacity, unable to fully exploit economies of scale, increases average costs
• Operating at less than full capacity, reduced sales, decreased market share
• But... under-utilised capacity means flexibility, can meet unexpected demand without customers waiting, higher customer satisfaction

Why 100% capacity utilisation is bad

• Production is rushed due to high levels of demand, negative effects on quality, lower customer satisfaction
• A high workload for employees, large amount of pressure, tiring for employees, demotivating, more mistakes, more wastage as well as higher absenteeism, perhaps more labour turnover
• Lack of flexibility, unable to respond to demand spikes, unhappy customers, loss of reputation lower sales, lower market share
• May have to pay staff to work overtime to meet orders made, causing costs to increase, reducing profit margins

Ways of improving capacity utilisation

• Invest in capital machinery
• Dismiss idle staff/invest in additional, productive staff