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Description
Flashcards by danny-hudson97, updated more than 1 year ago
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Created by danny-hudson97
about 10 years ago
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| Question | Answer |
| What Is Capacity? | Capacity of an organisation is the maximum output it can produce in a given period without buying any more fixed assets. Capacity depends on the number of employees and how skilled they are, also the technology the business own (machinery), also the kind of production process it uses and the capital invested into the business |
| Capacity Utilisation | Capacity Utilisation is how much usage a business is using. [Capacity Utilisation (%) = Output / Capacity x 100] |
| Drawbacks To Maximum (100%) Capacity Utilisation | 1) The levels of quality may drop if they are trying to have a 100% capacity utilisation. 2) The business may turn away customers. 3) There is no downtime and the machines are running none-stop. Reduces the life of machine. 4) There is no margin for error, a lot of pressure and stress on managers to get it right. 5) There'll be surplus stock as output is greater than demand. Not good for capital to be tied up in unsold stock. |
| What Is Subcontracting? | Subcontracting is when a firm uses its facilities to do work on behalf of another business. Companies can subcontract work to another business in busy periods. This means they can meet unexpected increases in demand without increasing their own capacity. |
| What Is Under-Utilisation? | Under-Utilisation is the term given when a business has low capacity utilisation. This is inefficient because it means business is not getting use out of machines and facilities that they have paid for. This increases costs because it causes fixed costs to be spread over less output so unit costs increase. (Unit Costs = Total Costs / Output) |
| Firms With Low Demand Should Try To Reduce Capacity | Sometimes firms have too much capacity and not enough demand for their product, which leads to under-utilisation. When this happens, they'll first try to increase demand, but if that doesn't work, they need to reduce capacity |
| Firms Have To Consider How Their Capacity Needs Will Change Over Time | 1) Demand Changes over time, so firms must think about demand in the future as well as the presence. 2) The key to long term success is planning capacity changes, to match long term changes in demand. However is not 100% certain, there's always that element of risk. 3) Short Term Changes in capacity utilisation provide flexibility. Firms should be flexible and temporarily increase existing capacity utilisation if an increase in demand isn't expected to continue long term. Long Term solutions end up lowering unit costs - as long as predictions of demand turn out to be true. |
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