Capacity utilisation and outsourcing
Capacity utilisation
- Capacity is the most a firm can produce with its resources.
$$\text{capacity utilisation} = \frac{\text{actual output}}{\text{maximum output}} \times 100\%$$
- Under-utilisation (low) → idle resources, high fixed cost per unit.
- Over-utilisation (near 100%) → no time for repairs, tired staff, lower quality.
- Most firms aim for 85–90%.
Practice
A factory makes 600 units but could make 800. What is its capacity utilisation (%)?
Capacity utilisation = 600 ÷ 800 × 100% = 75%.
Practice
A problem with low capacity utilisation is that:
Idle resources mean fixed costs spread over fewer units, so cost per unit is high.
Outsourcing
- Outsourcing = paying another firm to do work you used to do (cleaning, IT, parts).
- Benefits: can be cheaper, lets you focus on what you do best, adds flexibility.
- Drawbacks: less quality control, possible delays, risk of sharing secrets.
Practice
A drawback of outsourcing is:
Outsourcing can be cheaper and more flexible, but you lose some control over quality and timing.
You've got it
Key idea
- capacity utilisation = actual ÷ maximum output × 100%; aim ~85–90%
- under-utilisation = high fixed cost per unit; over-utilisation = no repair time, lower quality
- outsourcing = cheaper/flexible, but less control and possible delays