Achieve Profit Maximisation through Capacity Utilisation

In my last post, I discussed some ways of improving Profit through some simple methods. If you missed that post, please take a look. Today I would like to look into more detail about something which did come up in that article, Capacity Utilisation.

What is Capacity Utilisation?

The percentage of a firm’s total possible production level that is being reached. For example, if a company has space to produce 100 units of goods, but only produces 86, its capacity utilisation is 85%.

Advantages and Disadvantages of Spare Capacity

The most important aspect of capacity utilisation is getting it at the right level. Too low is obviously a bad idea as you are paying for space which you don’t need. But too much can be bad as well, as you haven’t got enough space for sudden demand increase. In the following section, I will be going over all the advantages and disadvantages of the levels of capacity.

Advantages of Spare Capacity

There is plenty of space to cope with an increase in demand. If the market is growing, you may want to make sure that you have space encase that big order comes in. This can apply to services as well; you can have 10 computer sections in an office, but only use 8, unless demand increases. This saves money in the short-term, because you aren’t paying extra people, or for extra machinery to be used when it is not needed.

Having less capacity being used can have a positive impact on staff and employees in your business. It can help relieve stress and the pressure of the job, as there is less chance of them being overworked. This can help save money, because you will have less people taking time off and hopefully, as staff are more motivated, they will work harder, increasing productivity and therefore profit margins. This will ultimately, help meet our objectives of Profit Maximisation.

Having less capacity being used means there is more time to concentrate on other aspects of the business. This could be an opportunity to train staff to get their productivity better, or it could help you to replace or improve machinery and equipment. In the long run, these changes could help to improve productivity, which again, will achieve Profit Maximisation, as shown in the previous paragraph.

Disadvantages of Spare Capacity

Unit costs will rise. If you are making fewer products, using less of your office space, you will be paying the same amount of fixed costs, which when divided by what you are doing, will show that unit costs are more. These higher costs could lead to lower profit margins or other problems, such as the need to increase prices of your products services, which in turn could make your business sell less.

As there is less work, your employees won’t have as much to do. This could lead to them getting unhappy with their job and in turn being less productive. Consequently, this can cause fewer products meaning made, leading to a vigorous cycle which can only be solved by sacking people.

Why Look At Capacity Utilisation Then?

Capacity Utilisation can impact on many different parts of a business and can impact heavily on how well you can achieve profit maximisation. As pointed out in the section above, each advantage and disadvantage has its reasons why it could help gain money and also why it may lose you money. In my opinion, you should always keep capacity around 75%, as this makes sure that your unit costs are relatively low, as you are using the majority of your capacity. It also means that you have some space to meet sudden increases in demand, which will keep you in line with your competition and make sure that you are on-the-ball.

If you have any questions about this article, please ask in the comments section.

In the next post, I would like to carry on looking at Capacity Utilisation, as when researching this subject, I found plenty of information, so much so, that I didn’t want to put it all in one article. So make sure you look out for part two on Friday.

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