Week4 DQ1

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Week4 DQ1

Introduction

Capacity levels are critical components of any production sector According to Leoncini and Montresor (2008 : 33-36 , capacity level refers to a match between a nation 's or enterprise 's production output and its installed equipment . It is important for any firm to know its optimal capacity in to have knowledge on the output to produce , which will match the maximization of using the equipment installed in the firm This helps the firm to prevent instances of under-utilization of the

br equipment present . Under-utilization occurs when firms produce lesser output than equipment can handle . The overuse of the existing equipment is known as excess capacity (Tirole 2007 : 318-321 . Both excess capacity and under-utilization represent inefficiency , since resources present are over-utilized and underutilized respectively

Capacity levels are important in analyzing the efficiency of using factors of production . This enables the management to take measures which improve the utilization of these factors to achieve optimal capacity . In case there is either excess capacity or under-utilization there is need to change the capacity levels . There are several factors which are considered when making the decision to change the capacity levels

Factors which are considered when changing the capacity levels

Present and future market trends

A firm should study its market before coming up with a decision on changing the capacity level . The firm should study the existing market demand in to determine if the present output matches the market demand (Handfield 2006 : 204-207 . Predictions on...