Capacity utilisation

Calculating it

Capacity utilisation = current output / maximum possible output x 100.

For example, a factory able to make 4,000 units a week that makes 3,400 has a capacity utilisation of 3,400 / 4,000 x 100 = 85%.

Fixed cost per unit = fixed costs / output, so higher utilisation spreads fixed costs over more units and cuts average cost. The October 2024 WBS12 paper opened with a 2-mark definition of capacity utilisation.

Under-utilisation

Low utilisation (spare capacity):

• Higher fixed cost per unit, so lower margins or less competitive prices.
• Idle staff and machines may lower morale; customers may see an empty restaurant or hotel as a bad sign.
• But spare capacity allows the firm to take on sudden large orders and do maintenance.

Over-utilisation

Running near or at 100%:

• Lowest fixed cost per unit.
• But no time for maintenance, so breakdowns become more likely; staff are stressed by overtime; quality may suffer; new orders must be turned away or delivered late.

Many firms aim for roughly 85 to 90% to balance cost and flexibility.

Improving utilisation

If utilisation is too low:

• Raise output: increase sales through marketing, new markets, or making products for other firms (subcontracting in).
• Cut capacity (rationalise): close or sell part of the factory, reduce shifts, lease out unused space.

If it is too high: increase capacity (invest, extra shifts) or subcontract (outsource) some work to other firms.

Worked example

A hotel has 120 rooms. On average 78 are occupied each night. Fixed costs are $9,360 a night. Find capacity utilisation and fixed cost per occupied room. What happens if occupancy rises to 102 rooms?

1. Utilisation = 78 / 120 x 100 = 65%
2. Fixed cost per room = 9,360 / 78 = $120
3. At 102 rooms: utilisation 85%, fixed cost per room 9,360 / 102 = $91.76

Answer: 65% and $120 per room; at 85% the fixed cost per room falls to $91.76

Check yourself

1. A factory can produce 50,000 units a month and produces 42,000. Calculate capacity utilisation.
   Show answer

   84 %. 42,000 / 50,000 x 100 = 84%.

2. A cinema has 360 seats and sells an average of 207 tickets per showing. Calculate capacity utilisation.
   Show answer

   57.5 %. 207 / 360 x 100 = 57.5%.

3. A firm produces 7,200 units, which is 80% capacity utilisation. What is its maximum capacity?
   Show answer

   9000 units. 7,200 / 0.80 = 9,000 units.

4. Fixed costs are $36,000 a month. Output rises from 6,000 to 9,000 units. By how much does fixed cost per unit fall?
   Show answer

   $2.00. 6.00 - 4.00 = $2.00 per unit.

5. In a WBS12 case study (October 2024), the number sold of a tour priced at $999 fell from 40 to 29 after capacity was cut. Calculate the fall in revenue.
   Show answer

   $10989. (40 x 999) - (29 x 999) = 39,960 - 28,971 = $10,989, as in the mark scheme.

6. Which is a problem of operating at close to 100% capacity utilisation?
   • Fixed cost per unit is very high
   • Workers have too little to do
   • No time for maintenance, so breakdowns become more likely
   • The business cannot cover its fixed costs
   Show answer

   No time for maintenance, so breakdowns become more likely. Machines and staff are stretched.

7. A firm with persistent spare capacity decides to close one of its three factories. This is
   • rationalisation
   • subcontracting
   • flow production
   • factoring
   Show answer

   rationalisation. Reducing capacity to match demand.

8. Define capacity utilisation.
   Show answer

   Capacity utilisation is the proportion of a business's maximum possible output that is actually being produced, current output divided by maximum possible output times 100.. Current output as a percentage of maximum possible output.

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Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Business specification (2018)
• Pearson Edexcel IAL Business WBS12 Unit 2 mark scheme, October 2024

Last updated 8 November 2026. Spotted a mistake? Tell us.