Capacity Utilisation

• Capacity is the maximum total output a business can produce in a given time period
• Capacity utilization is the percentage of total capacity actually being used
• High capacity utilization lowers cost per unit and increases profitability
• Overutilization of capacity can lead to difficulties in servicing and maintaining machinery
• High capacity utilization may result in turning away customers
• Businesses aim for a capacity utilization of around 90-95%
• Strategies to address underutilization include increasing demand or reducing overall capacity

Capacity utilization is the percentage of a business’s maximum total output that is actually being used. It is calculated by dividing the actual output by the maximum possible output and multiplying by 100. High capacity utilization is desirable as it lowers the cost per unit and allows for profitability. However, overutilization of capacity can lead to difficulties in servicing and maintaining machinery, as well as turning away customers. Most businesses aim for a capacity utilization level of around 90-95%. Strategies to address underutilization of capacity include increasing demand through marketing efforts or reducing overall capacity through rationalization. Overutilization can be addressed by increasing overall capacity or subcontracting part of the production process. However, subcontracting carries the risk of relying on another company’s performance.