1. Strategically, capacity and financial decisions are made first, followed by decisions on location of the facility, design of the product, layout and work systems.

2. Capacity is the upper limit or ceiling on the load that an operating system can handle. Essentially, it is the upper limit on output.

3. If products are similar enough, capacity is measured in common units or rates of output; when products are dissimilar, capacity is in units of resources used: machine time, labor hours, etc. Capacity is not measured in dollar units, because there can be substantial changes in prices over the life cycle of the product.

4. The capacity decision involves the type of equipment or facilities to be employed in producing the product or service, how much capacity or equipment is needed, and when it is needed. These decisions are often costly and difficult to modify.

5. Effective capacity is less than the design capacity, because the system may have alternative product-mix strategies, because of changes in design of the product and quality specifications, job requirements or work rules. Actual output would usually be less than effective capacity, because of shortages, delays, bottlenecks or changes in demand.

1. Efficiency is the ratio of actual output to effective capacity.
2. Utilization is the ratio of actual output to design capacity.

6. Planning considerations involve long-run trends, seasonal shifts in demand, and joint and competing products and services.

7. Cost-volume (breakeven analysis, supplemented by marginal analysis on the optimum size of a plant, helps in determining the optimum design capacity, for a variety of output rates.

8. The linear breakeven model discussed in this chapter assumes that there is only one product, all production is sold, variable cost per unit of output is constant, and that there is no change in fixed costs or in per unit revenues, regardless of volume. If there are major deviations from these assumptions, a nonlinear model should be used instead of a linear one.