Measurement and Significance of Capacity Utilisation

This set of vocabulary flashcards covers concepts related to business capacity, including measurement, efficiency impacts, management of excess and shortage, and the strategic use of outsourcing.

Maximum capacity

The total possible level of sustained output a business can achieve in a given time period.

Capacity utilisation

Measures the proportion of the maximum capacity that is currently being used.

Rate of capacity utilisation formula

$$\frac{\text{current output level}}{\text{maximum output level}} \times 100$$

Full capacity

A state where a business is achieving $100\%$ capacity utilisation and has no spare capacity.

Average fixed costs

Unit costs (such as rent and machinery depreciation) that fall when capacity utilisation is high because they are spread over a large number of units.

Excess capacity

A situation where a business is operating at less than full capacity.

Rationalisation

The process of closing factories or other production units to reduce overheads and increase capacity utilisation in the remaining units.

Capacity shortage

A situation occurring when the demand for a business's products exceeds its current output capacity.

Outsourcing

The practice of buying in specialist services, components, or completed products from outside businesses instead of performing the tasks internally.

Offshoring

A form of outsourcing that involves buying in services, components, or completed products from low-wage economies.

Core parts of the business

The main objectives and tasks of a business that management concentrates on while outsourcing peripheral activities.

Business process outsourcing (BPO)

The outsourcing of complete business functions to an external service provider.

Room occupancy rates

The specific term used to refer to capacity utilisation within the hotel industry.

Subcontracting

The practice of placing work contracts with outside firms to produce components or finished goods rather than making them in-house.