Capacity Utilization Rate Formula

Updated November 18, 2023

Capacity Utilization Rate Formula

Investors and management always want to make their company a financially strong institution. To financially strengthen an institution, operational efficiency must improve to save costs and raise revenue and profit.

So, as an analyst, management, or investor, it becomes imperative to study the company’s operational efficiency. The capacity utilization rate formula is one measure that looks into the company’s operational efficiency. Generally, the capacity utilization rate is used in the manufacturing industry.

Here’s the Capacity Utilization Rate Formula –

The capacity utilization rate is represented in percentage points.

The above ratio requires two separate operating components.

• The actual output produced by the firm during the period.
• And the maximum possible output a firm can produce in a given period of time.

Capacity utilization rate is a ratio used to calculate the rate at which maximum capacity or output levels are manufactured or used. The capacity utilization rate is displayed as a percentage figure, and it can give a proper insight into the estimation capability of the management and the general negligence about the capacity addition by the organization at a point in time. Capacity utilization rate is sometimes also called the operating rate of the plant or company.

Capacity utilization rate also helps find the economics of scale or diseconomy of scale. It also helps in finding out the breakeven of the company and the level at which piece costs per unit will rise. Manufacturing companies that manufacture physical products often use capacity utilization since it is easy to quantify physical goods.

For instance, if we look at a manufacturing firm for a financial year, we should be able to find how much the firm has produced during the financial year, and then we can check how much the firm can produce. Comparing these two components will hint at how much capacity the firm has utilized during the financial year.

Examples and Explanation of Capacity Utilization Rate Formula

XYZ company can produce 80,000 toys during a financial year. During the last financial year of 2016, they could only produce 60,000 toys due to the absence of labor. Find out the capacity utilization of XYZ company.

As we already know, the actual output of XYZ company during the last financial year of 2016, i.e. 60,000 toys. The potential output is 80,000 toys.

By using the formula of capacity utilization rate, we can calculate –

• Capacity Utilization Rate = 60,000/80,000
• Capacity Utilization Rate = 75 %

From the above, we can also find the slack of XYZ company during the last financial year of 2016.

• Slack = (100 % – 75 %)
• Slack = 25 %

If the capacity utilization rate of a firm is less than 100 %, then the firm can increase its production from the current level of production till the point capacity reaches 100 %.

If we look at it from a different point of view, we will find that this utilization rate shows how much slack in production a firm is doing at a particular time period.

For instance, if we see that the capacity utilization rate is 75% of a company in a given financial year, we can also find how much the firm couldn’t utilize during that particular financial year. The percentage of capacity the firm couldn’t utilize during the period is called “slack”. In the above-mentioned example, the slack of the firm during the financial year is = (100 % – 75 %) = 25 %.

Significance and Use

We need to take an example to understand the application of capacity utilization rate.

• From the above example, it is clear that capacity utilization shows a clear picture of the firm’s operational efficiency. The higher the utilization rate, the higher the firm’s operational efficiency.
• Even the capacity utilization rate has a great effect on the economic policies of the company. When policymakers make economic policies, they look at the capacity utilization of the firm to figure out how to stimulate capacity utilization in the overall economy.

Capacity Utilization Rate Calculator

You can use the following Capacity Utilization Rate Calculator

Capacity Utilization Rate Formula in Excel (With Excel Template)

Here, we will do the same example of the Capacity Utilization Rate formula in Excel. It is very easy and simple. You need to provide the two inputs, actual output and Maximum possible output

You can easily calculate the Capacity Utilization Rate using the Formula in the template provided.

we can calculate the Capacity Utilization Rate using Formula

You can find out Slack from Capacity Utilization Rate

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