Understanding production capacity allows a business to estimate future financial performance and create a timeline for delivering products. It's defined as the maximum output that an organization can produce with the available resources in a given period. Production capacity can be calculated based on a single type of product or a mix of products.

Tip

The formula for production capacity is machine-hour capacity divided by the time it takes to produce one product.

## Calculate the Machine-Hour Capacity

The first step in understanding production capacity is to calculate the machine-hour capacity of the factory or manufacturing plant. For example, say that a plant has 50 machines and workers can use the machines from 6 a.m. until 10 p.m., or for 16 hours a day. The daily plant capacity in hours is 16 hours multiplied by 50 machines, or 800 machine hours.

## Calculate the Production Capacity with One Product

Production capacity planning for a single product is a fairly straightforward calculation. Determine how long it takes to produce one unit of product, then divide the daily plant capacity in hours by the time it takes to produce a product to arrive at the daily production capacity. For example, say it takes a worker half an hour (0.5 hours) on a machine to make a widget and the capacity is 800 machine hours. The production capacity is 800 divided by 0.5, or 1,600 widgets per day.

## Calculate Production Capacity with Multiple Products

Calculating production capacity for a mix of products can be more complex. For example, say that in addition to producing widgets that take half an hour, the business also manufactures buttons that take 15 minutes (0.25 hours) on the machine. In this scenario, the number of widgets multiplied by 0.5 plus the number of buttons multiplied by 0.25 equals the total hourly capacity (800). Solve for the two variables: number of widgets and number of buttons. At 800 machine hours, one possible combination could be production of 800 widgets and 1,600 buttons.

## Understanding the Production-Capacity Utilization Rate

If you know your production capacity, you can measure how well you are using your capacity. Capacity-utilization rate is a measure of what percentage of capacity a business is currently performing at. The formula for capacity-utilization rate is actual output divided by the potential output. For example, say that a business has the capacity to produce 1,600 widgets a day as in the above example, but is only producing 1,400. The capacity utilization rate is 1,400 over 1,600, or 87.5 percent. The higher the percentage, the closer the business is to performing at full capacity.