Capacity Utilisation (Edexcel A Level Business)

• Capacity utilisation is measure of the level to which a businesses  assets   are being used to produce output
  
  
• It compares current output to the maximum possible output a business can produce using all of its assets and is expressed as a percentage
  
  
• Capacity utilisation is calculated using the formula
  
  

Under-utilisation

• If a business has a low level of capacity utilisation it will not be making the most of its resources and is likely to have increased unit costs
  • Fixed costs are spread over fewer units of output resulting in higher average total costs
  • Workers may be under-deployed leading to fears of redundancy
     
• Operating under capacity does provide a business with flexibility
  • There may be the opportunity to engage workers in maintenance tasks
  • The business can respond to sudden increases in demand
     

Over-utilisation

•  If a business has a high level of capacity utilisation it may not have the flexibility to respond to new orders from customers
  • Staff will be under a lot of pressure to produce high levels of output
  • Overworked staff may be inclined to leave increasing staff turnover 
  • Machinery may be pushed to its limits and prone to breakdowns which disrupts production and increase costs
      
• High capacity utilisation will minimise average total costs and increase business competitiveness
  • If workers are busy they are likely to feel secure in their employment 
  • A business that is busy is likely to be well thought-of and is likely to attract customers who are willing to wait for products to be delivered

• Achieving an optimum level of capacity utilisation is a key production objective
• A business has several options available to improve its capacity utilisation
  
  

Ways of improving capacity utilisation

• Increasing the level of capacity utilisation results in lower unit costs
   
• In some cases increasing demand and thus output is the most suitable way to increase capacity utilisation
  • E.g. reducing selling prices or offering short-term  price promotion can increase demand
  • If competitors go out of business then demand should pick up which will improve capacity utilisation without the need for further promotion
    
    
• Reducing its overall capacity will improve the level of capacity utilisation
  • Capacity can be reduced by selling capital equipment or reducing staff numbers