What is capacity utilisation?

The capacity utilisation calculation, what under-utilisation does to unit costs and profit, the risks of over-utilisation, and the ways a business raises its utilisation, from marketing and subcontracting to rationalisation.

What you need to know

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Numbers

How is capacity utilisation calculated?

Numbers

How does capacity utilisation affect unit costs and profit?

Evaluation

How can a business raise capacity utilisation, and what does running near full capacity cost?

Numbers

Explain how developing new products or entering new markets can improve capacity utilisation.

Numbers

State the capacity-utilisation formula.

Questions from this subtopic

Each one with the model answer underneath.

1
What is capacity utilisation?
Model answer
The percentage of a firm's maximum possible output that is currently being used.
2
State the formula for calculating capacity utilisation.
Model answer
Capacity utilisation (%) = (Current output ÷ Maximum possible output) × 100
3
In the capacity utilisation formula, what does 'current output' represent?
Model answer
The actual level of output the business is currently producing.
4
In the capacity utilisation formula, what does 'maximum possible output' represent?
Model answer
The highest level of output a business can achieve using all its available resources.
5
Calculate the capacity utilisation when current output = 1300 units, maximum possible output = 3000 units.
Model answer
Capacity utilisation = (1300 ÷ 3000) × 100 = 43.3 %.
6
Explain how under-utilisation of capacity affects unit costs.
Model answer
Fixed costs are spread over fewer units of output, which raises the cost per unit.

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