The capacity of a business is a measure of how much output it can achieve in a given period.
Examples of Capacity
- A fast-food outlet may be able to serve 1000 customers per hour.
- A call centre may be able to handle 10,000 calls per day.
- A football stadium may not be able to seat any more than 45,000 fans at each match.
- A car production line may be able to complete 50,000 cars per year.
Capacity is a Dynamic Concept
- Capacity can change such as:
- When a machine is having maintenance - capacity is reduced
- Capacity is linked to labour so working more production shifts can increase capacity
- Capacity needs to take into account seasonal or unexpected changes in demand:
- Chocolate factories need capacity to make easter eggs in November and December before shipping them to shops after Christmas.
- Ice-cream factories in the UK need to quickly increase capacity during a summer heat wave.
The proportion (%) of a business' capacity that is actually being used over a specific period.
Capacity Utilisation Formula
Capacity utilisation is expressed as a percentage and is calculated using this formula:
Actual level of output
Maximum possible output
Capacity Utilisation Example
- A company manufactures computers and is able to produce 50,000 computers per month. In the most recent month however, actual output was only 37,000 computers.
- Capacity utilisation = (actual output / potential output) x 100
- = (37,000 / 50,000) x 100
Why Capacity Utilisation Matters
- It is a useful measure of productive efficiency as it measures whether there are unused resources in the business.
- Average production costs tend to fall as output rises so higher capacity utilisation can reduce unit costs, making a business more competitive.
- Businesses usually aim to produce close to 100% in order to maximise efficiency and minimise unit costs.
- A high level of capacity utilisation is necessary if a business has a high break even output because of significant fixed costs of production.
Why Most Businesses Operate Below 100% Capacity Ut
- Demand lower than expected due to a possible change in customer tastes
- A loss of market share as competitors gain customers
- Seasonal variations in demand due to weather changes leading to lower demand
- Recent increases in capacity like a new production line being added
- Maintenance and repair programmes making capacity temporarily unavailable.
Dangers of Operating at Low Capacity Utilisation
- Higher unit costs impacting on competitiveness
- Business will be less likely to reach break even output
- Wasted capital will be tied up in under-utilised assets
Can a Business Work at More Than 100% Capacity Uti
- Possible in the short term.
- A company can increase workforce hours such as offering extra shifts, encouraging overtime or hiring temporary staff.
- Sub contacting of some production activities such as assembly of components.
- Reducing time spent maintaining production equipment.
Problems Working at High Capacity
- Possible negative impact on quality as production is rushed and there is less time for quality control.
- Employees may suffer due to added workloads and stress and possilbly de-motivating if sustained for too long.
- Loss of sales may occur as the business is less able to meet sudden or unexpected increases in demand and production equipment may need repairing causing delays.