Capacity Utilization

Capacity Utilization is defined as the extent or level to which the productive capacity of a plant, firm, or country is being used in generation of goods and services. Expressed usually as a percentage, it is computed by dividing the total capacity with the portion being utilized.

Capacity utilization is an important operational metric for businesses, and it's also a key economic indicator when applied to aggregate productive capacity. A company with less than 100% utilization can theoretically increase production without incurring expensive overhead costs associated with purchasing new equipment or property. Economies with extra slack can absorb significant increases in production without pushing past previous highs. The concept of capacity utilization is best applied to the production of physical goods, which are simpler to quantify.

The use of capacity utilization as a KPI
Capacity utilization is a widely used KPI and operational measure in many industries in the strategic capacity and business planning functions of many organizations. It can be used as a measure which helps determine optimum timing of capacity expansions, entry into new markets, market exits, cost curves for different manufacturers and profitability. Capacity utilization, along with other information, can also be used in operations and production management to calculate the average marginal cost of production, the split between fixed and variable costs, inventory , manning, overtime costs, and engineering/maintenance costs.

Formula to Calculate Capacity Utilization
The following is the formula for Capacity Utilization:

Capacity Utilization, CU = {(Actual Output - Potential Output) / Potential Output}.

On the other hand,
Capacity Utilization Rate, CUR = {(Actual Output - Potential Output) / Potential Output}

Further Reading

• Capacity Utilization and Effects on Product and Profit Chron
• Capacity Utilization and Efficiency Cary Countryman