Capacity of a plant can be expressed as the rate of output viz., units per day or per week or per month, tons per month, gallons per hour, labor hours/day, etc. But for organizations whose product lines are more diverse, it is difficult to find a common unit of output. More appropriate measure of capacity for such firms is to express the capacity in terms of money value of output per period of time (day, week or month).
Capacity may be measured in terms of inputs or outputs of the conversion process. Some of the examples of common measures of capacity are given below:
Organization————-Measure of Capacity
Automobile factory————-No. of vehicles
Steel Mill————-Tons of steel
Power plant————-Megawatts of electricity generated
Brewery————-Barrels of beer
Job shop————-Labor hours worked
Airline————-No of seats
Hospital————-No of beds
Movie theatre————-No of seats
Restaurant————-No of seats
University————-No of students
Warehouse————-Cubic space of storage space ————————–(in cubic meter)
Bank————-No of accounts
Major considerations in capacity decisions are:
1. What size of plant? How much capacity to install?
2. When capacity is needed? When to phase-in capacity or phase-out capacity?
3. At what cost? How to budget for the cost?
Determination of Capacity:
Capacity determination is a strategic decision in plant planning or factory planning. Capacity decisions are important because:
(a) They have a long-term impact.
(b) Capacity determines the selection of appropriate technology, type of labor and equipments, etc.
(c) Right capacity ensures commercial viability of the business venture.
(d) Capacity influences the competitiveness of a firm.
Factors affecting determination of Plant Capacity
(a) Market demand for a product/service.
(b) The amount of capital that can be invested.
(c) Degree of automation desired.
(d) Level of integration (i.e. vertical integration).
(e) Type of technology selected.
(f) Dynamic nature of all factors affecting determination of plant capacity, viz., changes in the product design, process technology, market conditions and product life cycle, etc.
(g) Difficulty in forecasting future demand and future technology.
(h) Obsolescence of product and technology over a period of time.
(i) Present demand and future demand both over short-range, intermediate-range and long-range time horizons.
(j) Flexibility for capacity additions.