9609 · 4.3.1
Significance and measurement of capacity utilisation flashcards
Revision flashcards for Cambridge 9609 Significance and measurement of capacity utilisation (syllabus 4.3.1). Flip, recall, then mark a real past-paper question.
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Capacity utilisation formula?
(Actual output ÷ Maximum possible output) × 100%.
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Effect of low utilisation?
Higher unit fixed cost; wasted machinery/labour.
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Effect of very high utilisation?
Overtime stress, maintenance skipped, quality falls.
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Improve utilisation how?
Promotions, new markets, shift patterns, reduce capacity.
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Link to break-even?
Low utilisation raises effective unit cost - harder to break even (5.4.4).
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Seasonal business?
Low utilisation off-season may be unavoidable - flexible staffing helps.
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Max capacity?
Theoretical maximum - rarely sustained 100% long term.
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Outsourcing link?
4.3.2 - use external capacity when internal utilisation low.
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What is the formula for capacity utilisation?
(Current Output / Maximum Possible Output) x 100. It measures the percentage of a firm's total potential production capacity that is actually being used.
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Define 'under-utilisation' in a business context.
A situation where a business is producing at less than its full capacity. This leads to higher fixed costs per unit and suggests that resources are not being used efficiently.
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What are the main risks of 'over-utilisation'?
Operating at or above 100% capacity for sustained periods can lead to machinery breakdowns, employee stress and burnout, a decline in quality, and the inability to accept new orders or perform maintenance.
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What is 'rationalisation' as a strategy to improve capacity utilisation?
A process of improving efficiency by cutting the scale of operations, often involving closing factories or laying off staff, to reduce maximum capacity and thus increase the utilisation rate with existing demand.
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How can 'subcontracting' be used to manage capacity utilisation?
A business can subcontract work TO other firms to meet excess demand when it is over-utilised. Conversely, it can take ON subcontracted work FROM other firms to increase output when it is under-utilised.