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 Leverage

    A measurement of the degree to which a firm or project incurs ...
  6. Operating Expense

    A category of expenditure that a business incurs as a result ...
RELATED FAQS
  1. How do I find the information needed for input into the Dividend Discount Model (DDM)?

    Analysts and investors should utilize a company’s financial statements, stock information websites and any number of analysis ... Read Full Answer >>
  2. What does the Dividend Discount Model (DDM) show an investor about a company?

    The dividend discount model, or DDM, is not designed to be used in forecasting any possible capital gains from increases ... Read Full Answer >>
  3. If a company has a high debt to capital ratio, what else should I look at before ...

    A variety of equity valuation metrics can be utilized to evaluate a company along with the debt to capital ratio to get a ... Read Full Answer >>
  4. How can a firm bring down its operating leverage?

    A company with a lower percentage of fixed costs and a higher percentage of variable costs uses less operating leverage. ... Read Full Answer >>
  5. How does DuPont Analysis measure profitability?

    DuPont analysis determines profitability by measuring assets at their gross book value, which produces a greater return on ... Read Full Answer >>
  6. Which financial statements are most important when performing ratio analysis?

    Financial ratio analysis is an important aspect of fundamental analysis for any party engaged in value investing. Financial ... Read Full Answer >>
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. Economics

    International Financial Reporting Standards (IFRS)

    International Financial Reporting Standards are accounting rules and guidelines governing the reporting of different types of accounting transactions.
  5. Charts & Patterns

    Why These May Be the Top 4 Growth Stocks of 2015

    These four stocks have high upside potential in 2015.
  6. Entrepreneurship

    The Story Behind Shake Shack's Success

    A humble Madison Square Park hot dog stand grew to become a gourmet casual food powerhouse in a classic American success story.
  7. Entrepreneurship

    How Americans Can Apply For European MBA Programs

    Studying for an MBA in Europe is a great idea for Americans looking for a career boost.
  8. Charts & Patterns

    Are These the Top Dividend Stocks of 2015?

    These dividend-paying companies offer a lot more than just dividends.
  9. Charts & Patterns

    Top 10 Alternative Energy Stocks for 2015

    As energy demands continue to rise, the alternative energy sector is heating up. Here are the top 10 promising alternative energy stocks for 2015.
  10. Charts & Patterns

    Why Is Chipotle So Successful & Popular?

    Chipotle's emphasis on simplicity and high-quality ingredients have made the restaurant immensely popular among consumers and, in turn, investors.

You May Also Like

Hot Definitions
  1. Fixed-Income Arbitrage

    An investment strategy that attempts to profit from arbitrage opportunities in interest rate securities. When using a fixed-income ...
  2. Venture-Capital-Backed IPO

    The selling to the public of shares in a company that has previously been funded primarily by private investors. The alternative ...
  3. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  4. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
  5. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced through ...
  6. Security Market Line - SML

    A line that graphs the systematic, or market, risk versus return of the whole market at a certain time and shows all risky ...
Trading Center