25 Capacity utilisation (A Level)

If a firm is operating at 70% of its capacity, which one of the following statements is true?

• Fixed costs are currently lower than they would be at full capacity.

• There is excess capacity.

• The firm would have to take on more workers to increase production.

• The firm is making a profit

It is estimated that businesses in the car industry will be profitable if for every four cars being produced and sold there is only the capacity to produce five cars. What level of capacity utilisation is necessary to ensure profit is made?

• 125%

• 20%

• 75%

• 80%

As a firm increases its capacity utilisation from 50% to 60%, then, other things being equal, average fixed costs will:

• remain unchanged

• increase by 20%

• fall

• become 0

In a particular industry, it was observed that worldwide capacity rose to 15 million units a week in the fourth quarter of 2014, up from 14 million in the third quarter. Capacity utilisation also increased to 95%, from 90% in the third quarter. By how much did actual production per week increase between the third and fourth quarter?

• 165,000 units

• 1 million units

• 1.65 million units

• 12.6 million units

A manufacturer has a capacity of 100,000 units per month. At this level of production, the fixed cost per unit is $0.10 and the variable cost per unit is $0.15. What is the average total cost at a capacity utilisation of 40% (assume that variable costs are linear)?

• $0.40

• $0.25

• $0.475

• $0.625

A firm that is faced with the problem of long-term excess capacity is most likely to benefit from which one of the following strategies?

• rationalisation

• increasing production and adding to inventories

• reducing employee holidays so that more can be produced

• reducing promotional expenditure

Which one of the following is not a problem associated with full-capacity working? a a decline in customer service if demand increases b a reduction in downtime during which maintenance can be carried out c inability to meet increased levels of demand d worker demotivation due to fears over job security

• a decline in customer service if demand increases

• a reduction in downtime during which maintenance can be carried out

• inability to meet increased levels of demand

• worker demotivation due to fears over job security

A firm operating at full capacity decides to outsource production to a subcontractor in order to meet increasing demand. Which one of the following is a disadvantage of such an approach?

• In the short run it is more costly than investment in new premises.

• The firm loses direct control over quality.

• It will increase the overtime demands made on existing workers.

• It leads to an increase in the number of employees directly employed

Which one of the following is not a possible cause of under-utilisation of capacity (excess capacity)?

• employment by the business increases but output does not

• a fall in demand

• retrenchment

• increasing capacity

Capacity utilisation is defined as:

• the proportion of maximum potential output currently being produced

• full-capacity output

• maximum output ÷ current output × 100

• the level of output that is in balance with demand