IB Business Management HLTopic 5 — Operations ManagementPaper 1 & 2Core skill~11 min read
Capacity, Productivity and Other Metrics
Operations managers cannot improve what they do not measure. This page covers the five calculations the syllabus asks for. None of them is hard arithmetic — the marks are in knowing which formula to reach for and in saying what the number actually means for the business.
📚 What you need to know
Capacity utilisation compares current output with the maximum output possible, as a percentage.
Low utilisation raises unit costs, because fixed costs are spread over fewer units.
Very high utilisation lowers unit costs but removes flexibility and strains staff and machines.
Defect rate is the percentage of output that is not fit to sell.
Productivity is output per input — per worker (labour) or per machine (capital).
Cost to make versus cost to buy decides make-or-buy questions, alongside qualitative factors.
Capacity utilisation
Capacity utilisation
Capacity utilisation (%) = (current output ÷ maximum possible output) × 100
Maximum possible output means what the business could produce using everything it has — all the machines, all the floor space, the full working week. Anything below that is spare capacity the business is still paying for.
Neither bar is automatically better. A is wasting money; B has almost nowhere to put an unexpected order and no slack for maintenance.
Why unit costs fall as utilisation rises
The fixed costs do not change when output changes. Spread them over more units and each unit carries a smaller share. This is the single most useful sentence in the whole topic, and it is worth seeing as a curve.
The curve flattens. A firm at 40% gains hugely from a new contract; a firm at 90% gains almost nothing per unit and risks overloading its staff.
Under-utilisation and over-utilisation
Level
Problems
Hidden benefits
Under-utilisation
Higher unit costs, idle machines and staff, fear of redundancy
Room to accept new orders, time for maintenance and training
Over-utilisation
No flexibility, staff under pressure and leaving, machines breaking down
Low unit costs, job security, a reputation for being in demand
Defect rate
Defect rate
Defect rate (%) = (number of defective items ÷ total output) × 100
If not every unit can be checked, the same formula is used with the number of items tested on the bottom instead. Businesses chase a lower defect rate because faulty output cannot be sold, generates returns and refunds, damages reputation, and in some industries brings legal risk.
Productivity
Labour productivity
Labour productivity = total output ÷ number of workers
Capital productivity
Capital productivity = total output ÷ number of machines
Higher labour productivity means each worker produces more, so the labour cost carried by each unit falls. That is what makes productivity a competitiveness issue and not just an efficiency one — it lets a firm cut price or raise margin without cutting wages.
What raises productivity. Better training and recruitment, investment in technology, software that removes fiddly manual tasks, and motivated staff. Notice that three of those four are really Unit 2 topics.
Make or buy decisions
Cost to buy
Cost to buy = (purchase price × quantity) + delivery costs
Cost to make
Cost to make = (average variable cost × quantity) + fixed costs
Compare the two totals. If buying costs more, keep production in-house; if making costs more, buy from a supplier. But the numbers are only half the decision. Before committing, a business also asks whether it has spare capacity, whether the supplier’s quality and reliability can be trusted, and whether this activity is something it should be specialising in at all.
Make-or-buy questions almost always give figures that are close together. That is deliberate. A gap of a few per cent is easily wiped out by one quality problem, so the qualitative factors decide the answer — and the marks.
Worked examples
WORKED EXAMPLE 1
A plant can produce 40,000 units a month. Last month it produced 34,000. Calculate its capacity utilisation, and state one implication. [3]
Step 1: divide output by maximum output34,000 ÷ 40,000 = 0.85Step 2: turn it into a percentage0.85 × 100Capacity utilisation = 85%Step 3: say what it means
Fixed costs are spread over a large share of possible output, so unit costs are relatively low, but only 6,000 units of spare capacity remain for new orders.
If the question gives the percentage instead, rearrange: output = utilisation × maximum. 72% of 25,000 is 18,000 units.
WORKED EXAMPLE 2
A cable maker produced 26,000 units, of which 468 failed testing. Calculate the defect rate. [2]
Step 1: divide defects by total output468 ÷ 26,000 = 0.018Step 2: multiply by 1000.018 × 100Defect rate = 1.8%Round sensibly and always add the percentage sign. A bare 0.018 will not score the second mark.
WORKED EXAMPLE 3
In 2024 a firm made 60,000 units with 40 workers. In 2025 it made 79,200 units, and the workforce grew by 10%. Calculate the percentage change in labour productivity. [4]
Step 1: productivity in 202460,000 ÷ 40 = 1,500 units per workerStep 2: find the 2025 workforce, then its productivity40 × 1.10 = 44 workers79,200 ÷ 44 = 1,800 units per workerStep 3: percentage change(1,800 − 1,500) ÷ 1,500 × 100 = 20%Labour productivity rose by 20%The workforce increase is buried in a percentage on purpose. Work it out before you divide.
WORKED EXAMPLE 4
A cafe needs 8,000 bread rolls a week. A bakery would supply them at $0.85 each plus $200 delivery. Baking in-house would cost $0.62 a roll in ingredients plus $1,900 a week in fixed costs. Recommend what it should do. [5]
Step 1: cost to buy($0.85 × 8,000) + $200 = $6,800 + $200 = $7,000Step 2: cost to make($0.62 × 8,000) + $1,900 = $4,960 + $1,900 = $6,860Step 3: compareMaking is $140 a week cheaperStep 4: the qualitative check
$140 on $7,000 is a saving of only 2%. Baking in-house needs oven space, trained staff and time the cafe may not have, and any drop in demand leaves the $1,900 fixed cost unchanged.
A recommendation to buy, despite the numbers, can score full marks if it is justified this way.
💡 Exam tip
Always interpret the number. “85%” is one mark; “so unit costs are low but there is little room for new orders” is the rest.
Watch for rearranged formulas. You may be given the percentage and asked for output, or given productivity and asked for the number of machines.
Include units in every answer. Units per worker, percentage, dollars.
Make-or-buy needs both halves. Do the calculation, then weigh capacity, quality, reliability and core competency.
Show working line by line. Method marks are awarded even when the final figure is wrong.
⚠️ Common mix-up
Capacity utilisation is not productivity. One measures how much of the plant is used; the other measures output per worker or machine.
Productivity is not production. Output can rise while productivity falls, if the workforce grew faster than output.
100% utilisation is not the goal. It leaves no room for maintenance, breakdowns or a rush order.
A low defect rate is not free. Getting there needs training and quality systems that cost money.
Cost to make must include fixed costs. Leaving them out makes making look artificially cheap.
Up next: Handling a Business Crisis — what happens when the supply chain, the machinery or the reputation fails all at once.
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