Underutilization - Definition & Example
What is Underutilization?
Underutilization means a situation of not utilizing machines or resources to the fullest capacity or the production capacity. Under-utilization of resources have an impact on profits of the company and hence are a matter of concern for the management. Under utilization can be in terms of machines, labor, raw materials, etc.
Machines designed for a particular capacity are face underutilization when the demand for the products to be produced on it decreases. This means that fixed cost per unit of product are higher in comparison to the price per unit of product. This has serious consequences on our business and in turn our operations. Thus, an asset is underutilized when the capital invested in it fails to create its anticipated use, instead creating unnecessary hindrances in capital budgets that would put a limitation on its capacity to invest in other areas.
Example of Underutilization
In times of recession when companies don’t have projects, we generally see a lot of manpower sits idle, but they are still being paid. This is an example of under-utilization of manpower.
Another example can be of an restaurant which has high end machines for making pizzas and other dishes. Due to changes in the prices and availability of raw materials, there may be underutilization of machines as the optimum number of pizzas cannot be made which can be profitable for the business. Let us say if machines work for 8 hours and make 100 pizzas a day then the business is able to earn profit and machines also work at maximum capacity. But if the demand for pizza and supply of raw materials go down. Same machines would be making 40 pizzas leading to underutilization by 60 pizzas a day.
Hence, this concludes the definition of Underutilization along with its overview.
This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.
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