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Introduction - Definitions
Capacity can be defined as the ability to hold,
receive, store, or accommodate
Capacityused
Capacityutilization rate
Best operatinglevel
Capacity used
rate of output actually achieved
Best operating level
capacity for which the process was designed
Best Operating Level
Example: Engineers design engines and assembly lines to
operate at an ideal or best operating level to maximize
output and minimize ware
Average
unit cost
of output Underutilization Overutilization
Best Operating
Level
Volume
Example: Capacity Utilization
During one week of production, a plant produced 83
units of a product. Its historic highest or best utilization
recorded was 120 units per week. What is this plants
capacity utilization rate?
Answer:
Capacity utilization rate = Capacity used
Best operating level
= 83/120
=0.69 or 69%
Economies of Scale
Average cost per unit of output drops as plant gets
larger
Plants also gain efficiencies when they become large
Diseconomies become a problem when plants
become too large
Size of plant influenced by external factors:
Cost of transporting raw materials and products
Potential market size
Effect of Learning Curve
Plants gain experience as they produce more
Cost of production falls in a predictable manner
Learning curve percentage vary across industries
Large plants gain both from economies of scale and
learning curve advantages
Product must meet customers needs
Demand must be large to support volume
Illustration: Learning Curve
Yesterday
Cost or Today
price Tomorrow
per unit
100-unit
Average plant
unit cost 200-unit
of output plant 300-unit 400-unit
plant plant