Explain one circumstance in which capacity utilisation can be a vital measure of a business’s performance.

Answer 1

Factories are expensive. If you have a much larger factory than you need, you are wasting money. Airplanes are also expensive. If you own an airline and only fill your aircraft half way, then you will lose money.

If, however, you do not have a large enough factory to build something or you do not have enough seats in your airplane for people to sit in, you will need to forego sales.

If you only utilize 30 percent of your capacity, your costs will probably be too high to be competitive in your industry. If you are consistently using 100 percent of your capacity, you will also have problems with being competitive, because other companies will pick up the revenue you miss when you forego sales due to a lack of capacity.