Capacity Utilization Rate (CUR): Definition & Measurement

Instructor: Artem Cheprasov

Artem has a doctor of veterinary medicine degree.

In this lesson, we'll go over the concept of capacity utilization rate. You'll learn what this is, what it tells us, what factors can influence it, and how you can calculate it for yourself.

Max Capacity

Do you work at your maximum capacity on a day-to-day basis? How do you even quantify that? Is it how fast you do something? Is it how many of your mitochondria are working at full steam to power you through the day? Maybe it's simply the number of hours you put in or the amount of product you personally make.

It's hard to quantify the extent to which an individual uses all of their resources to the max. However, this is a lot easier to quantify in the business world when it comes to physical goods. In fact, there's a term for it, it's called the capacity utilization rate.

Let's define it and go over an example of it.

What Is Capacity Utilization Rate?

The capacity utilization rate (CUR) is, at its core, the extent to which a firm's production capacity is being utilized. In other words, the proportion/percentage of resources (like factories, equipment, etc) a firm has at its disposal that are currently engaged in producing something.

As a result, the capacity utilization rate helps us ascertain the proportion/percentage of a company's total potential economic output that is being actually being realized. Capacity utilization thus helps answer the question of How much is our company producing as a percentage of what our company can produce?

A percentage less than 100% may indicate numerous different things, including:

  1. Demand. If there is little demand, a company may have to operate below full capacity.
  2. Competition. If a company is outcompeted for business, they may also be operating below full capacity.
  3. Maintenance/repairs. As in, machinery is undergoing necessary repairs.
  4. Anticipation. A company may purposefully operate at below 100% capacity in order to accommodate periodic surges in demand.

Calculation & Example

To calculate the capacity utilization rate you need to divide actual output by potential output and multiply by 100. That is to say:

Capacity Utilization Rate = ((Actual Output) / (Potential Output)) x 100

For example, let's say your company can potentially produce 10,000 stone blocks per day. However, at this moment in time, you are producing only 5,000 stone blocks per day. What is the capacity utilization rate?

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