5.6 - Production planning

Capacity utilisation

measures a firms existing level of output as a proportion of its potential output.

the ideal percentage is close to 100%

Capacity utilisation formula

actual output / potential output x 100

Methods to improve capacity utilisation

• improve marketing strategies - increased sales leads to a higher percentage

• subcontract work - renting out when unused to keep the area being used

• reduce capacity - spare capacity might exist because of excess capacity

What does high levels mean?

Higher level of capacity utilisation, the more efficiently a business is using its resources → high levels mean low fixed cost per unit

When do low levels occur?

• Low capacity utilisation a lot of machinery will stand idle

• Less work is completed by each worker

• Output per worker will fall so labour productivity will fall too

• Flexible workforces may need to cut working hours

Why is high more efficient?

Because fixed costs are spread over a large output, therefore costs are lowered

Company is now more profitable, can invest and increase quality or even lower prices to attract demand

At 100% there if no flexibility

Why at extreme high levels of CU might there be problems? what about pretty low levels?

At high capacity utilisation, the quality might decrease, greater problem is that’s a firms USP

Staff overworked, tired and then demotivated

At low levels of CU, quality also may decrease due to demoralised workers and no drive to work

What levels are ideal?

90%