Question

Differentiate between design capacity and capacity utilization.

Briefly describe three capacity expansion strategies.

Answer 1

Design capacity refers to the maximum output capability of a firm, while capacity utilization is the actual level of output achieved. Three capacity expansion strategies include vertical expansion, horizontal expansion, and joint ventures or collaborations.

Step-by-step explanation:

Design capacity refers to the maximum output or production capability of a firm under ideal conditions. It represents the highest level of output that can be achieved in theory.

Capacity utilization refers to the actual level of output or production that a firm is currently achieving. It is the ratio of actual output to design capacity, expressed as a percentage.

Three capacity expansion strategies include:

1. Vertical expansion: This involves increasing the capacity of existing facilities through the addition of new equipment or technology. For example, a manufacturing company may invest in new machinery to increase its production capacity.
2. Horizontal expansion: This involves increasing capacity by adding more facilities or production lines. For example, a retailer may open new stores in different locations to expand its capacity to serve more customers.
3. Joint ventures and collaborations: This involves partnering with other companies to share resources and increase capacity. For example, two companies in the same industry may form a joint venture to combine their production capacities and serve a larger customer base.