2.4.2 - Capacity Utilisation
Capacity utilisation is a classic Edexcel business topic because it links a simple calculation to some very practical management decisions. In this lesson, you will learn how to measure it, why both under-utilisation and over-utilisation can create problems, and how businesses can move capacity utilisation towards a more efficient level.
Measuring Capacity Utilisation
Capacity utilisation
The current output of a business expressed as a percentage of its maximum possible output.
Capacity utilisation compares what a business is currently producing with what it could produce if its available labour, machinery and buildings were fully used. It is therefore a measure of how intensively a firm's resources are being used.
At 100%, the business is at full capacity. If the figure is below 100%, it has spare capacity. In manufacturing, maximum output can often be estimated fairly clearly from machine time and labour availability. In services, the idea is the same, but the precise maximum can be harder to measure because demand and staffing can be less predictable.
Capacity utilisation
If a bakery can produce 8,000 loaves per day but currently produces 6,000, its capacity utilisation is 75%. That matters because the percentage is not just a number. It helps managers judge whether resources are sitting idle, being used efficiently, or being pushed too hard.
Under-Utilisation Of Capacity
Under utilisation
The position where a business is producing at less than full capacity.
Under-utilisation means the business has excess capacity. This can happen because demand is weak, sales are seasonal, or the business expanded faster than the market grew. A low capacity utilisation figure is often a warning sign because fixed costs such as rent, salaries of senior staff and depreciation do not fall in line with output.
Because those fixed costs stay broadly the same, they are spread over fewer units when output is low. This raises average cost per unit, which can reduce profit margins or make the business less price competitive. Therefore under-utilisation can be a financial problem even if the factory, shop or service operation is still technically running.
However, under-utilisation is not always bad. Spare capacity gives a business flexibility. If demand rises suddenly, it can increase output without the delay and cost of building a new factory or recruiting a large new workforce. It can also make it easier to schedule maintenance, staff training or changes to production without disrupting customers.
In the UK cinema market, chains such as Vue and Cineworld often have much lower seat usage on weekday daytime showings than on Friday evenings. The buildings and much of the staffing cost are still there, so low utilisation pushes cost per customer up, but the spare capacity also lets cinemas cope easily with weekend peaks.
The strongest exam answer usually recognises both sides. Under-utilisation can increase average costs and create concern about job security, but some spare capacity may be sensible if demand is seasonal or uncertain.
Over-Utilisation Of Capacity
Over utilisation
The position where a business is running at full capacity and straining resources.
High capacity utilisation can look attractive at first. When output is high, fixed costs are spread across more units, which lowers average cost. A busy business may also appear successful to customers and other stakeholders because strong demand suggests the product is popular.
But over-utilisation becomes risky when it lasts. If staff and machinery are already fully stretched, the business has very little room to respond to further demand. That can lead to delayed orders, lost sales, weaker service quality and pressure on workers. In the longer term, it may also mean maintenance is postponed, machines wear out faster, and training becomes harder to organise.
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