Which statement about capacity utilization is commonly true in production planning?

Which statement about capacity utilization is commonly true in production planning?

• A. Operating at 100% capacity is always optimal.
• B. Some excess capacity is usually optimal.
• C. Excess capacity always reduces costs.
• D. Capacity utilization does not affect cost behavior.

Answer: (B)

Capacity planning centers on balancing fixed costs with the need for flexibility to absorb demand variability. Fixed costs exist whether you produce a little or a lot, so producing more units spreads those fixed costs and lowers the average cost per unit. But pushing to full capacity often brings higher variable costs—overtime pay, fatigue, shorter product life, more frequent setup disruptions, and quality issues—and reduces your ability to respond to changes in demand. Keeping some spare capacity gives you a cushion to handle unexpected spikes, schedule maintenance without halting output, and avoid costly rush orders. The trade-off is between the savings from higher utilization and the costs and risks of operating at the edge; so, having some excess capacity is typically optimal.

Capacity planning centers on balancing fixed costs with the need for flexibility to absorb demand variability. Fixed costs exist whether you produce a little or a lot, so producing more units spreads those fixed costs and lowers the average cost per unit. But pushing to full capacity often brings higher variable costs—overtime pay, fatigue, shorter product life, more frequent setup disruptions, and quality issues—and reduces your ability to respond to changes in demand. Keeping some spare capacity gives you a cushion to handle unexpected spikes, schedule maintenance without halting output, and avoid costly rush orders. The trade-off is between the savings from higher utilization and the costs and risks of operating at the edge; so, having some excess capacity is typically optimal.