Production Capacity

Published by MBA Skool Team, Last Updated: January 22, 2018

What is Production Capacity?

Production Capacity is the maximum output that can be produced in a business with available resources. They are usually calculated over a month or days and compared over the same. It is a measure of efficiency such that we can adjust our production according to the demand.

There is no such term as maximum output, it’s just that when our best is being given, how much can be produced keeping in mind the available resources.

E.g.: Productivity of a farm.

It is how you manage your raw materials, employees, time and storage in a efficient way to equalize demand. Decisions in such cases takes time and depends upon a lot of factors such as:

1. Raw materials should be ready; in fact, they should be in excess as all of them are not in ready to use condition.

2. Labor should be present at the required time and place.

3. Warehousing/storage needs to be seen as storage has a particular capacity and needs to be cared about. Shelf life of different goods/items is different and needs to be taken into consideration.

4. Equipment should be optimized so as to reduce the time and hence the cost.

E.g.: Demand for Ice-cream suddenly rises during summers.

The average annual production capacity is defined as:

(Production capacity at the beginning of the year) + (Average annual capacity of the equipment introduced during the year) – (Average annual capacity of the equipment removed during the year).


This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.

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