What is Capacity?

Capacity is the maximum sustainable rate of output that an operation can achieve. It is impossible to maintain a production level at the theoretical maximum capacity level for very long, because any number of inefficiencies and failures within a production process will result in a lower output level.

A business can improve upon this capacity level by closely managing its bottleneck operation. A business may build up an excess amount of capacity as a reserve, if it tends to experience peak loads that are well above the average level.

Impact of Capacity on Revenue

The amount of capacity limits the revenue that a business can generate. If a business invests in an excessively low amount of capacity, then it will not be able to meet customer demand, which places a cap on the amount of its sales.