CHAPTER 38: CAPACITY UTILISATION
I. Capacity Utilisation
Is the use that a business makes of its resources.
If a business is running at full capacity, the business cannot
increase production because it has maximised its capacity
utilisation which means it makes use all its factors of
production.
If the business operates less than its full capacity, it will have
spare, excess surplus, or unused capacity. Business might
want to have spare capacity to cope with increased orders
from regular customers. Without this, a business might let
down its customers & risk losing them.
A. Spare Capacity
is the difference between potential output & actual output.
Example: Potential output=100
Actual output=50
Spare Capacity=100-50=50(This can be utilized to increase
production.)
B. Measuring Capacity Utilisation
II. Implications of Under & Over Utilisation of Capacity
A. Implications of Under Utilisation - is the position where a business is
producing at less than full capacity; business is producing too less.
Benefits of Under Utilisation:
A business would be able to cope more easily with sudden increases in
demand. A business that is not able to meet immediate customer
needs may lose out in the long term. Customers might go to rivals that
are able to deal with demand fluctuations.
When working below full capacity there is less likely to be work-related
stress. Both workers & managers will be more relaxed & comfortable
with their workloads. This can reduce sickness & absenteeism.
Drawbacks of Under Utilisation:
Business working with under utilized capacity will not be making the
most of its resources. These resources will become unemployed so the
business average cost will be high because they have to give
maintenance to this resource. Hence, unit costs are not minimised.
CHAPTER 38: CAPACITY UTILISATION
Operating with too much spare capacity may also affect the morale of
workers. They many feel that the business is struggling to generate
orders. This might mean that worker may fear of losing their jobs. If
workers become used to a ‘light’ workload, they may resent working
harder if the business suddenly gets more orders.
B. Implications of Over Utilisation - is the position where a business is
running at full capacity & ‘straining’ resources.
Many businesses would prefer to operate close at full capacity
because average costs are lower (the higher the output, the
lower the average cost).
However, if a business is running at full capacity, it might be
over utilizing its resources. This means that resources will be
stretched uncomfortably.
Benefits of Over Utilisation:
If the business over utilise its resources, they will be producing higher
output which leads to lower average cost. This will raise profits &
improve competitiveness.
Staff motivation might be good if workers feel secure in their jobs.
People in the organisation may also be happier if there is lots of work
with opportunities to increase their earnings by doing overtime.
Drawbacks of Over Utilisation:
The pressure of constantly working at full capacity can put a strain on
some of the resources. As well as causing stress & tiredness to the
workforce, possibly increasing the risk of absence/ accidents, machines
may also be overworked to breaking point.
Business may not be able to respond to an increase in demand. For
example, business might lose profitable orders from new customers.
CHAPTER 38: CAPACITY UTILISATION
III. Ways of improving Capacity Utilisation (under & over
utilisation)
1. Reduced capacity -Business might decide to reduce its excess
capacity by getting rid of resources that the business can do
without. For example, reduce staff by making people redundant/
move to smaller premises where costs are lower.
2. Increase sales -If the business plan to increase sales, it means it
will have to increase its output. Increasing its output means they
will have to use more of its capacity. Thus, capacity will be
maximised.
3. Redeployment -If a business has too many resources in one part of
the business, it may be possible to deploy them in another part.
For example, a bank may ask some of its employees to work in
another branch for a short period.