Adjusting capacity takes into account the maximum level of output that can be produced by a firm, and how that can be changed in order to change the potential forecasts of a firm's performance long term . This involves capacity planning and management that will keep a firm from growing too fast in sales and making sure it is utilizing capital in the most efficient way possible. Capacity planning is the process of determining the production capacity needed by an organization to meet changing demands for its products. In the context of capacity planning, "design capacity" is the maximum amount of work that an organization is capable of completing in a given period. "Effective capacity" is the maximum amount of work that an organization is capable of completing in a given period due to constraints such as quality problems, delays, material handling, etc.
Thunderbird Assembly Line
Adjusting capacity will affect the amount of items produced on the assembly line.
Capacity utilization is a concept in economics and managerial accounting that refers to the extent to which an enterprise or a nation actually uses its installed productive capacity. Therefore, it refers to the relationship between actual output that 'is' produced with the installed equipment and the potential output which 'could' be produced with it, if capacity was fully used. Implicitly, the capacity utilization rate is also an indicator of how efficiently the factors of production are being used. Much statistical and anecdotal evidence shows that many industries in the developed capitalist economies suffer from chronic excess capacity. Therefore, critics of market capitalism argue the system is not as efficient as it may seem, since at least 1/5 more output could be produced and sold, if buying power was better distributed. However, a level of utilization somewhat below the maximum prevails, regardless of economic conditions. As a result, we look into capacity utilization to forecast a firm's success and growth numbers when predicting how financial statements will look into the future. The decision makers at the firm will be able to adjust this capacity in order to grow the firm in a way they feel is optimal.