Capacity Utilization Rate
Definition of Capacity Utilization Rate
Capacity utilization rate is a metric which is used to compute the rate at which probable output levels are being met or used. The output is displayed as a percentage and it can give a proper insight into the general negligence that the organization is at a point of time. Capacity utilization rate is also called as operating rate.
Capacity utilization rate also helps in verifying the level at which piece costs will rise. Capacity utilization rate is best when used for companies that manufacture physical products instead of services, as it is easy to quantify goods than services.
Formula used to measure Capacity Utilization Rate:
The capacity utilization rate can be ascertained using the formula
(Actual Output – Potential Output) / Potential Output x 100
If company ABC produces 15,000 computer chips at a cost of around $0.50 per unit, and if it has been determined that the company can further produce 20,000 units without a rise in the cost of production, the company is found to be working at a capacity utilization rate of 75% i.e., (15000/20000*100)
The capacity utilization rate provides with the value of production capacity which is actually being utilized over a specified period, and by providing the output in percentages, it can provide you a clearer idea of the total utilization of resources and how better the production company can fare in case the total output is increased without it effecting the cost of production to the company.
Although capacity utilization rate is important for several business decisions, it is still not enough to provide with the actual feedback necessary for economic and market conditions at a given particular time. The decrease in the capacity utilization rate percentage denotes an economic slowdown, an increase shows economic expansion.
The capacity utilization rate cannot exceed beyond 100% as no machine or human can be expected to work to a full capacity of 100%, the maximum capacity utilization rate that can be expected is of 90% as there can be many problems that can arise both with the man and the machine. You can have several issues relating to working of machinery that would not allow you to have optimum output. Similarly, a worker cannot always perform to his maximum every day. Capital utilization rate provides you with not a hundred percent rate, but with a rate that can help you with finding out the general output that can be generated.
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