Capacity Utilization Rate

AAA

DEFINITION of 'Capacity Utilization Rate'

A metric used to measure the rate at which potential output levels are being met or used. Displayed as a percentage, capacity utilization levels give insight into the overall slack that is in the economy or a firm at a given point in time. If a company is running at a 70% capacity utilization rate, it has room to increase production up to a 100% utilization rate without incurring the expensive costs of building a new plant or facility.

Also known as "operating rate".

Graphically:

Capacity Utilization Rate



INVESTOPEDIA EXPLAINS 'Capacity Utilization Rate'

Capacity utilization rates can also be used to determine the level at which unit costs will rise. For instance, let's say that Company XYZ currently produces 10,000 widgets at a cost of $0.50 per unit. If it is determined that it can produce up to 15,000 widgets without costs rising above $0.50 per unit, the company is said to be running at a capacity utilization rate of 66% (10,000/15,000).

This is best applied to companies that produce physical goods rather than services, as the capacity measurements are much easier to quantify.

RELATED TERMS
  1. Capacity Management

    The management of the limits of an organization's resources, ...
  2. Aggregate Capacity Management

    The process of planning and managing the overall capacity of ...
  3. Fixed Cost

    A cost that does not change with an increase or decrease in the ...
  4. Labor Intensive

    A process or industry that requires a large amount of labor to ...
  5. Operating Expense

    A category of expenditure that a business incurs as a result ...
  6. Contribution Margin

    A cost accounting concept that allows a company to determine ...
Related Articles
  1. Fundamental Analysis

    Ratio Analysis Tutorial

    If you don't know how to evaluate a company's present performance and its possible future performance, you need to learn how to analyze ratios.
  2. Options & Futures

    Explaining The World Through Macroeconomic Analysis

    From unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone.
  3. Investing

    Doing More With Less: The Sales-Per-Employee Ratio

    If used properly, this ratio can give you insight into a company's productivity and financial health.
  4. Investing

    What's a Debit Note?

    A debit note is a document used by a seller to inform a purchaser of a dollar amount owed. As the name indicates, it is a note from the seller that a debit has been made to the purchaser’s account. ...
  5. Professionals

    What does C-Suite Mean?

    C-Suite is a slang term used to describe the highest level senior executives of a corporation. This is the decision-making, power center of a company. These individuals are usually paid well, ...
  6. Fundamental Analysis

    Efficiency Ratio

    There are many types of efficiency ratios, but all measure how well a company utilizes its resources to make a profit. Business managers use these ratios to determine how well they are operating ...
  7. Investing Basics

    What is Profit?

    Profit is a general term used to denote when earnings exceed the expenses incurred to generate those earnings.
  8. Investing

    What's a Monopolistic Market?

    A monopolistic market has a significant number of characteristics of a pure monopoly. Though there may be more than one supplier, the market has high prices, suppliers tightly control availability ...
  9. Professionals

    What's Human Capital?

    Human capital is a company asset, but it’s not listed on the balance sheet. Human capital is all of the creative skills and knowledge embodied in the employees of a company -- skills that bring ...
  10. Investing

    What's Capitalization?

    Capitalization has different meanings depending on the context.

You May Also Like

Hot Definitions
  1. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  2. Subsidy

    A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy ...
  3. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
  4. Technical Skills

    1. The knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as ...
  5. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  6. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
Trading Center