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Summary Capacity Utilisation
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Describes capacity utilisation, implications of under-utilisation of capacity (spare capacity), and ways of improving capacity utilisation.
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Theme 2 Topic 2Capacity Utilisation
Capacity Utilisation
Capacity – the maximum possible level of output with the resources available
Capacity Utilisation – measures how effectively a firm is using its capacity, as a percentage
Capacity Utilisation (%) = Actual Output x 100
Maximum Possible Output
Implication of Under-Utilisation of Capacity (Spare Capacity)
Under-Utilisation Capacity is where a firm’s output is below the maximum possible output.
Causes of Under-Utilisation:
Poor quality leading to lack of demand Poor marketing – not selling in the right
Can’t afford to operate at capacity way
Seasonal demand Changes in tastes or fashion
Poor management Too much investment in machinery
Advantages of Spare Capacity Disadvantages of Spare Capacity
Able to deal with increases in demand Not making a maximum amount of
Can focus on quality sales/profit
Waste food/raw materials
Still paying staff though they aren’t doing
anything
Have to pay the same for electricity
Bad reputation
A firm will try to aim for around 90% capacity utilisation which allows some opportunity to maintain and repair
equipment and respond to customer demand whilst keeping fixed costs spread efficiently.
Capacity Shortage – where there is not enough capacity to fulfil customer orders
Ways of Improving Capacity Utilisation
In order to improve capacity utilisation a firm needs to match production closely to the level of demand
Adjusting Demand
Decrease price so more can afford it – predatory, competitive, psychological pricing
Improve the quality of the products – rebrand, repackage, better production methods
Move online to be more accessible
Increase promotion e.g. TV adverts, brand loyalty scheme, personal selling
Adjusting Supply
If a business has spare capacity it might decide to follow a policy of rationalisation to reduce its capacity and
save unnecessary expenditure
Rationalisation – a process of improving efficiency by cutting back on the scale of operations – reducing
capacity
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