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Unit 2 - Capacity utilisation :star: - Coggle Diagram
Unit 2 - Capacity utilisation
:star:
Capacity utilisation
= the use that a business makes of its resources
Calculation = current output / maximum possible X 100
Implications of under - utilization
= a business that is producing less than full capacity
:check: reduce sickness and rates of staff absences
:red_cross: operating inefficiently because its units cost are not maximized.
:check: be able to cope more easily with sudden increases in demand > both workers and managers will be more comfortable with their workloads
:red_cross: workers might feel insecure of losing their jobs because of the light workload so they may dislike working harder if the business suddenly gets more orders
Implications of over-utilization
=a business that is running at full capacity and straining resources.
:check: a busy operation can improve the company's image. As a result, customers might be more confident when placing orders.
:red_cross: may put pressure on workers which increases the risk of accidents or absence.
:check: average cost will be lower because fixed costs will be spread across more units of outputs.
:red_cross: may not be able to cope with sudden increase in demand
:red_cross: there may insufficient time for staff training and maintenance work.
Dealing with under-utilization
Outsourcing - hiring or contracting another business to do work. Outsourcing then becomes a strategy for increasing demand.
Reduce capacity - move to smaller premises where costs are lower. Sell of unused fixed assets such as machinery
Increase usage - such businesses would increase capacity utilization during off peak hours. E.g a business can offer incentives like discounts during off beak hours when traveling
However... these all depend on the capital the business has to finance these methods to increase production and ease of how they can be implemented. If there is not enough working capital available to do such things, it could be seen as an opportunity cost.
Dealing with over-utilization
Raising prices- one way to deal with rising demands. Higher prices might reduce demand so that the pressure on production resources is reduced. However, even tho it improves profit margin, it is risky since customers might find a cheaper alternative and never return
Expansion - if a business is confident that rising demand will continue, they can expand the scale of its operations. By extending current premises, a business can eventually build up capacity.
Increase inventories - if a business knows in advance that there is likely to be a future surge in demand, it can be prepared by building up stocks. However, this approach is only helpful if a business has spare capacity during normal operating hours.