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B.SAI KIRAN (12NA1E0036)
WHAT ISTHE CAPACITY UTILIZATION?
Capacity utilization is an
economics concept which refers
to the extent to which an
enterprise or a nation actually
uses its installed productive
capacity. Thus, it refers to the
relationship between actual
output produced and potential
output that could be produced
with installed equipment, if
capacity was fully used.
Production capacity is usually defined in terms of the following
Factors of production that is used in production activities of
Product which is obtained as result of utilization of production
Being of the whole occupations and efforts of production within
a certain period of time,
Consequently, the production capacity is said that business will
bring about the amount of production by using the factors of
production in a rational manner in a certain period of time.
TYPES OF CAPACITY
Three types of capacity are often referred to:
The capacity that can be made available to influence
the planning of senior management (e.g. in helping
them to make decisions about overall business growth,
investment etc). This is essentially a long-term decision
that does not influence day-to-day production
The amount of production capacity that can be made
available in the short-term. This is the maximum
potential capacity - assuming that it is used
An important concept. Not all productive capacity is
actually used or usable. It is important for production
managers to understand what capacity is actually
CAPACITY UTILIZATION RATE
The capacity utilization rate, also known as the
capacity utilization ratio, is a percentage-based ratio
that applies to the actual productivity of a business or
country. It specifically references the ratio between true
output – what is actually produced, and potential
output – what could be produced.
In general, maximum actual output of a company is always going to be less than 100% due to the actual resources. it
possesses, human factors including employee output, machinery limitations and maintenance
Capacity utilization rate reveals how close a firm is
to its best operating point.
rate of output actually achieved
Best operating level
capacity for which the process was designed
Example of Capacity Utilization Rate
During one week of production, a plant produced
83 units of a product. Its historic highest or best
utilization recorded was 120 units per week. What
is this plant’s capacity utilization rate?
DETERMINATION OF CAPACITY
Capacity determination is a strategic decision in plant
planning or factory planning. Capacity decisions are
They have a long-term impact.
Capacity determines the selection of appropriate
technology, type of labor and equipments, etc.
III. Right capacity ensures commercial viability of the
IV. Capacity influences the competitiveness of a firm.
Factors affecting determination of Plant Capacity:
a) Market demand for a product/service.
b) The amount of capital that can be invested.
c) Dynamic nature of all factors affecting
determination of plant capacity changes in the product
design, process technology, market conditions and
product life cycle, etc. .
D) Type of technology selected.
E) Difficulty in forecasting future demand and future
Factors which will be cared while a
capacity of plant is being estimated:
Growth opportunities of the facility in future,
the development plans of the facility for the future,
Scale value of the facility that took place in the economic sector,
Efficiency, productivity and profitability are targets which is
anticipated by the facility
Funding opportunities which can be benefited by the facility,
Technological level and production methods,
Production quality assurance / security,
Demand / sales level
Capacity utilization is the long term strategic decision
that enables the firm’s overall resources.It is focused
on the level of capacity that we provide the each stage
of production system.