Capacity Utilisation is basically how much the business is making divided by how much the business can potentially make. Here is the all-important equation:
Capacity Utilisation = Current Output / Maximum Possible Output *100
Remember any equation that has *100 (times 100) at the end, the unit will ALWAYS be a percentage.
|Costs Graph for a Business: More they make the less
the average fixed cost it
For most businesses, their ideal capacity utilisation is in excess of 90%, otherwise, their business won’t be efficient.
As you can see from the graph, as quantity increases, the average fixed costs decrease which is where the business becomes more efficient. Therefore, the more the business produces, the lower the average fixed cost will be.
Advantages of Working at Full Capacity
- Like I just said, lower average costs (the fixed costs are spread over more output).
- Improves image amongst customers (business looks successful, busy customers).
- Increases Staff Motivation and Job Security.
Disadvantages of Working at Full Capacity
- Cannot produce any more which means you could miss out on lucrative orders from customers.
- Training and Maintenance increases (increased pressure on staff and machines and a lack of time generally).
- Strain on Resources.
Improving Capacity Utilisation
By reducing capacity will make it easier to have 100% capacity utilisation. e.g. 5000/10,000 is only 50% Capacity Utilisation where if they reduced the maximum capacity to 7,500, the capacity utilisation will rise to 66%.
Increasing sales will increase revenue and therefore it would be easier to get a profit. If selling more, you are using more of your capacity.
Increased Usage – Peaks and trough in demand
-Stock up on stock e.g. Fireworks or Easter eggs.
The capacity utilisation is stock that can now be used for next season.
Subcontracting or Outsourcing
Subcontracting is when you take orders and produce ‘things’ for other businesses. Subcontracting will increase capacity utilisation as you are now making more not just for your business but for other businesses as well.
Key Terms of Capacity Utilisation
- Subcontracting and Outsourcing – Employing another firm to carry out deliveries.
- Redeployment – Transferring workers from one department to another.
- Reducing Capacity – to increase CU: Reducing staff, selling of fixed assets, leasing out capital.
- Increasing sales – to increase CU: running a promotional campaign.