1.Capacity is the maximum rate of output of a process. 2. Capacity decision

1.Capacity is the maximum rate of output of a process.

2. Capacity decisions should be made separate from strategic decisions.

3. Capacity can be expressed by output or input measures.

4. Input measures of capacity are inherently more accurate than output measures of capacity.

5. Utilization is the degree to which equipment space or labor is currently being used.

6. One reason economies of scale drive down cost is the spreading of fixed costs.

7. Economies of scale drive down cost even though the cost of purchased materials can be expected to increase.

8. Diseconomies of scale is a concept that states that the average unit cost of a service or good can be reduced by
increasing its output rate.

9. A capacity cushion is the amount of inventory that a firm maintains to handle sudden increases in demand or
temporary loss of production capacity.

10. A larger capacity cushion may be required due to variation in demand changing product mix or supply
uncertainty.

11. A smaller capacity cushion may be required if a process is highly capital intensive.

12. A larger capacity cushion can help firms uncover process inefficiencies so they can find ways to correct
them.

13. Capacity cushions may be lowered if companies smooth the output rate by raising prices when inventory is low and
decreasing prices when it is high.

14. An expansionist capacity strategy involves large infrequent jumps in capacity where a wait-and-see strategy
involves smaller more frequent jumps.

15. A wait-and-see capacity strategy minimizes the chances of lost sales due to insufficient capacity.