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Capacity Utilisation

Whats your spare capacity?


Capacity 42,000

What if they only sell 21,000 tickets?

Recap economies of scale

What is the main difference between economies and diseconomies of scale? What are the 5 main economies of scale? Why might employee motivation decrease as a result of growth? What are the managerial motives for growth?

Capacity Utilisation
A firms productive capacity is the total level of output or production that it could produce in a given time period. Capacity utilisation is the percentage of the firms total possible production capacity that is actually being used.

Another formula
Capacity utilisation =

Current output x 100 Maximum possible output

Company can make 10,000 units Are currently making 7,000 Capacity at 70% with 30% spare capacity (3,000 units!)

Capacity calculations
Company has 50,000 capacity They made 45,000 this year 30,000 last year ..
2m/45,000 = 44.44 per unit 2m/30,000 = 66.67 per unit

What would the cost per unit be if the FC were 2m?

So why dont all businesses work at 100% capacity..????? may not be

Youll have to spend more on staff overtime to satisfy orders, increasing labour costs Staff may feel under excessive pressure, leading to increased mistakes, absenteeism and labour turnover enough time for routine maintenance, so machine breakdowns may occur more frequently and orders will be delayed

Draw backs of 100% capacity.

If the factory space is overcrowded, work may become less efficient due to the untidy working conditions It may not be possible to meet new or unexpected orders so the business cannot grow without expanding its scale of production

Whats wrong with working at 100% capacity?

hospitals Gym


What causes under utilisation?

New competitors new products substituting yours Change in tastesfashion Unsuccessful marketing campaign Seasonal demand .crackers and flip flops! Over investment in new technology Merge between 2 businesses.

Whats the best capacity utilisation?

something between 80 to 90% capacity utilisation because fixed costs per unit are relatively low and there is some scope to meet new orders or carry out maintenance and training. A firm that has just invested in major new facilities in anticipation of major growth could take some time before reaching a good level of utilisation, so it is important to consider sales trends when discussing capacity utilisation.

Problems arising from low capacity utilisation

Higher fixed costs per unit mean reduced profitability; if prices were raised to cover these costs, this would probably lead to reduced sales unless the product was price inelastic. Spare capacity can portray a negative image, particularly in a business where it can be seen that it is no longer busy such as a shop or a health club - signifying loss of popularity Staff can become bored and demoralised if they dont have as much to do, especially if they fear losing their jobs

How to improve capacity utilisation.?

Increase demand.. But how??? Cut capacity.But how???

Lease or sell off part of production line Reduce hours.shorter working week or cut hours per day Lay off workers!

Opportunity cost
What are the benefits of having spare capacity? Can meet sudden increase in demand Can allow staff time for training Machines can be fixed without disrupting productivity. WORK TO DO: P340 revision questions: 2, 4, 5, 6

Read unit 48 Make notes on EVALUATION section.