4.3 Capacity utilisation and outsourcing – Capacity utilisation
What is Capacity Utilisation?
Capacity utilisation measures how much of a business’s maximum production capacity is actually being used.
Formula (written in LaTeX):
\$\text{Capacity utilisation} = \frac{\text{Actual output}}{\text{Maximum capacity}} \times 100\%\$
Think of a pizza oven: if the oven can bake 10 pizzas per hour (maximum capacity) but you only bake 6, your utilisation is 60 %.
Operating Under Maximum Capacity 🚀
- Idle machines or staff → higher cost per unit.
- Opportunity cost: potential sales lost.
- Lower economies of scale.
- Can be a sign of over‑investment in capacity.
Operating Over Maximum Capacity 📈
- Overtime pay, increased wear & tear.
- Risk of quality problems.
- Potential for higher unit costs if demand is temporary.
- Can lead to the need for outsourcing or temporary staff.
Example: Factory Production
| Scenario | Maximum Capacity (units/day) | Actual Output (units/day) | Capacity Utilisation (%) |
|---|
| Normal | 100 | 80 | 80 % |
| Peak Demand | 100 | 120 | 120 % |
Outsourcing When Capacity is Over‑Max
When demand spikes beyond a firm’s capacity, outsourcing part of production can:
- Meet customer orders on time.
- Avoid costly overtime.
- Allow the firm to focus on core activities.
Example: A clothing brand outsources extra shirts to a partner factory during holiday season.
Exam Tip 📚
When answering questions on capacity utilisation:
- State the formula clearly.
- Show your calculation step‑by‑step.
- Interpret the result: Is the firm operating efficiently?
- Discuss possible actions (e.g., outsourcing, scaling capacity).
Remember: High utilisation can be good, but too high may lead to quality issues.