Question
Capacity Utilisation
What is capacity utilisation?
Answer
Definition
It measures how much of a business’s production capability is being used.
This section covers capacity utilisation, its impact, measurement, and the strategic implications of outsourcing.
Capacity utilisation calculation affects cost efficiency and profitability.
Methods for balancing demand and output capacity.
Optimal Utilisation: Finding the optimal capacity utilisation balances cost efficiency and operational stability.
The dual impact of outsourcing on a business.
What is capacity utilisation?
It measures how much of a business’s production capability is being used.
How is capacity utilisation calculated?
Capacity Utilisation (%) = (Actual Output / Maximum Possible Output) × 100
Why is high capacity utilisation important?
It reduces unit costs by better using fixed costs and improves cost efficiency.
What happens when a business operates under capacity?
Resources are underused, increasing average costs and wasting capacity.
What are the effects of operating over maximum capacity?
Equipment and labor are overstretched, causing delays, lower quality, and higher maintenance costs.
Name one method to improve capacity utilisation.
Increasing marketing to boost demand.
What is outsourcing in the context of capacity utilisation?
Contracting external businesses to perform some operations instead of doing them internally.
List a potential risk of outsourcing.
Reduced control over quality and delivery.
What is the main benefit of outsourcing?
Cost savings and access to specialist skills.
Why must businesses balance capacity utilisation optimally?
To maintain cost efficiency without overstressing resources or compromising quality.