Business – 4.3 Capacity utilisation and outsourcing – Capacity utilisation | e-Consult
4.3 Capacity utilisation and outsourcing – Capacity utilisation (1 questions)
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| Factor | Under Capacity | Over Capacity |
| Fixed cost per unit | Higher – fixed overheads spread over fewer units | Lower – more units absorb fixed costs |
| Variable cost per unit | Potentially lower if inputs are purchased in smaller, cheaper batches | Higher – overtime premiums, extra maintenance, and increased waste |
| Revenue | May be limited by inability to meet demand | Potentially higher if demand exceeds supply, but risk of discounts to clear excess stock |
| Profit margin | Compressed due to high unit fixed costs | Can improve if extra output is sold at normal price, but may fall if quality issues force price cuts |
The table illustrates that while over‑capacity utilisation can spread fixed costs and boost revenue, it also introduces higher variable costs and quality risks that may erode profit margins. Conversely, under‑capacity operation keeps variable costs low but suffers from high fixed‑cost allocation and missed sales opportunities.