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Name:
Date Taken:
Class:
Total Possible Marks: 32
Capacity Utilisation
Complete the following questions in the time allowed by
your teacher
QUICK DEFINITIONS
Write a short, accurate definition for each of the following key terms. (2 marks for each
good quality definition)
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1. Define: production capacity
Answer: a measure of the total amount or quantity that can be produced in a given period. Usually
expressed in terms of units of output (e.g. a car factory might measure capacity in terms of
numbers of finished cars that can be made each week)
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2. Define: capacity utilisation
Answer: the proportion of capacity that is actually used in a given period. Capacity utilisation is
expressed as a percentage which is calculated by comparing the actual production output with the
potential production capacity
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3. Define: excess capacity
Answer: arises where output is less than potential capacity - i.e. where capacity utilisation is less
than 100% If a firm has excess capacity then it has the potential to increase production without
needing to add to capacity.
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4. Define: unit cost
Answer: the average cost per unit for a given quantity of output produced. Calculated as total costs
divided by total units
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QUICK LISTS
In this section, provide an outline or list points which answer the question
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5. List three different kinds of business and how they might measure capacity
A. Football club - capacity is the number of seats in the ground
B. Hotel - number of bedrooms available for sale each night
C. Retail clothing chain - area of available selling space in each store
D. Airline - number of seats available to sell per flight
E. Steel mill - volume/weight of steel that can be made each week
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6. List three reasons why a business is likely to consider capacity utilisation an
important measure of performance
A. Maintaining production capacity usually involves a high level of fixed costs - so
it important to make the best use of that capacity
B. Capacity utilisation is closely linked to production efficiency - a decline in
utilisation might signal a problem with efficiency
C. Too high a level of capacity utilisation might signal that a business cannot take
full advantage of demand for its products and services
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Short Answers
In this section, write a short answer (one or two sentences) for each question.
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7. Explain three reasons why a business might be operating at significantly less than
full capacity
Valid points include:
Lower than expected demand:
- General reduction in overall market demand
- Loss of market share (i.e. competitors have gained a higher share of the market)
- Seasonal variation in demand
Increase in capacity not yet matched by increased demand:
- Possibly new technology introduced
- Provides some “slack”
- Products might still be at the introduction stage of their plc
Inefficiency (a problem = less competitive unit costs)
- Poor maintenance, quality, employee disruption
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8. Describe three ways in which a business could respond to a situation of excess
demand / under capacity
Valid points include:
- Increase workforce hours (e.g. extra shifts; encourage overtime; employ
temporary staff)
- Sub-contract some production activities (e.g. assembly of components)
- Reduce time spent maintaining production equipment
- Reduce the amount of finished goods carried in stock to address the excess
demand
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9. Explain why a business may experience problems if it tries to operate a very high
levels of capacity utilisation
Valid points include:
Negative effect on quality (possibly)
- Production is rushed
- Less time for quality control
Employees suffer
- Added workloads & stress
- De-motivating if sustained for too long
Loss of sales & profit
- Less able to meet sudden or unexpected increases in demand
- Production equipment may require repair
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10.
Complete the capacity utilisation calculations for Jenkins Roadside Cafes Ltd
based on the table above
Cafe 1: meals capacity 1,000
Cafe 2: spare capacity 375
Cafe 3: capacity utilisation 90%
Cafe 4: meals capacity 2,000
Cafe 4: capacity utilisation 85%
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