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Study notes

Capacity Utilisation

  • Levels: GCSE, AS
  • Exam boards: AQA, Edexcel, OCR, IB

Capacity utilisation is a measure of the extent to which the productive capacity of a business is being used. It can be defined as:

The percentage of total capacity that is actually being achieved in a given period

Capacity utilisation (expressed as a percentage) is calculated using this formula:

Here is an example of the formula above in action:

Capacity utilisation is an important concept:

  • It is often used as a measure of productive efficiency
  • Average production costs tend to fall as output rises – so higher utilisation can reduce unit costs, making a business more competitive
  • So firms usually aim to produce as close to full capacity (100% utilisation) as possible

Is there an ideal level of capacity utilisation? The answer is – it depends!

There are several reasons why businesses operate at less than 100% capacity utilisation:

Lower demand:

  • General reduction in overall market demand
  • Loss of market share
  • Seasonal variation in demand

Increase in capacity not yet matched by increased demand:

  • Possibly new technology introduced
  • Provide some "slack"

Inefficiency (a problem = less competitive unit costs)

  • Poor maintenance, quality, employee disruption

When a business is operating at less than 100% capacity, it is said to have "spare capacity".

Sometimes spare capacity is not the problem – a business finds itself with excess demand (i.e. it cannot produce enough to meet demand). In such circumstances, what can it do to operate at higher than 100% normal capacity? It can often:

  • Increase workforce hours (e.g. extra shifts; encourage overtime; employ temporary staff)
  • Sub-contract some production activities (e.g. assembly of components)
  • Reduce time spent maintaining production equipment

However, there are some potential pitfalls with operating at very high capacity (i.e. around 100%):

Negative effect on quality (possibly)

  • Production is rushed
  • Less time for quality control

Employees suffer

  • Added workloads & stress
  • De-motivating if sustained for too long

Loss of sales

  • Less able to meet sudden or unexpected increases in demand
  • Production equipment may require repair
Revision Video - Calculating Capacity Utilisation
Revision Video - Capacity Management

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