3.4.3 Making operational decisions to improve performance: increasing efficiency and productivity: The Importance of Capacity. Flashcards
Define capacity.
The maximum total output or production that a business can produce in a given time period.
What does increasing capacity usually involve?
An increase in capital equipment, land and other resources - important to avoid excess capacity that will merely add to a firms costs.
Why is capacity important to a firm?
Enable it to meet the level of demand for a product.
Ensure a firm is not spending excessive amounts on capital equipment and other resources and therefore is able to control its unit costs.
Allows flexibility between different production lines - supply can meet demand if one product experiences an increase in popularity - shift resources from the production of a less popular product.
Some industries e.g., farming, must ensure they have enough capacity to cope with peak production periods and seasonal demand.
No close competition - lack of capacity is less of an issue - customers will not be able to find alternative supplies - many firms in highly-competitive market outsource or subcontract - meaning they do not need to spend money on expanding capacity - likely to be more expensive - company actually producing the product will charge a price that includes their profit margin.
