Capacity Utilisation Flashcards

Flashcards about Capacity Utilisation

Capacity

The maximum amount of goods/services a firm can produce.

Capacity Utilisation

Shows how much of current capacity a firm is using; how much of a firm's maximum output is actually being produced.

Capacity Utilisation Formula

Actual Output / Maximum Possible Output * 100

100% Utilisation (Full Capacity)

The firm is working 'flat out' and using all resources.

Advantages of 100% Utilisation

Lowers average costs, increases profitability.

Disadvantages of 100% Utilisation

No time for staff training or machine maintenance, staff may be stressed, no flexibility for unexpected orders.

Over Utilisation of Capacity

Producing at higher than the nominal capacity level.

How to Achieve Over Utilisation

Increasing workforce hours, reallocating workers, subcontracting work.

Benefits of Over Utilisation

Economies of scale, motivated staff, benefits of responding to increased demand.

Drawbacks of Over Utilisation

Poorer quality, stress on staff, inability to respond to increased demand, less time for training/maintenance, increased costs.

Benefits of Low Capacity Utilisation

Allows for maintenance, reduces stress, enables better handling of increased demand.

Drawbacks of Low Capacity Utilisation

Unit costs rise, staff insecurity, increased prices, eroded profit margins, idle staff/machinery.

How to Increase Low Capacity Utilisation

Increase demand, reduce capacity (downsize), improve productivity, outsourcing.

Key Factor when Under Utilising

The underlying cause of a fall in demand.

Key Factor at Full Capacity Utilisation

Whether the change in demand is temporary or permanent.

Short Term Options at Full Capacity

Offer overtime, subcontract, temp/pt staff.

Long Term Options at Full Capacity

Increase production capacity, invest in better stock control.

Conclusion

A balance between high capacity utilisation (lower average costs) and the flexibility some ‘slack’ provides.