Optimum capacity – definition and meaning
Optimum capacity is a manufacturing rate with the lowest possible cost. When a company is at optimum capacity, it produces the most it can with the smallest amount of cost. In other words, a production capacity in which the cost of production of one extra unit is the same as the average cost for every unit.
Put simply, you reach optimum capacity when the cost to produce each unit cannot be any cheaper.
We use the term not only for goods but also for services.
According to The Law Dictionary, optimum capacity is:
“[A] situation in which a company is producing a high quantity of goods at the lowest possible cost per unit.”
The word ‘optimum’ means ‘the best’, or ‘the most likely to bring success.’
According to the Online Etymology Dictionary, ‘optimum’ appeared in the English language in 1879. It is a Latin word that means ‘best.’ We used the term initially in biology. However, it then spread into many other fields, including economics and business.
The term ‘optimization‘ refers to trying to get the maximum production at the lowest possible cost. The verb is to ‘optimize.’
Maximum capacity vs. optimum capacity
When we try to maximize capacity, it means we try to produce as much as possible. In that sense, it is similar to trying to optimize capacity. However, maximum capacity disregards costs.
Optimum capacity is a combination of maximum capacity and minimal costs.
Put simply; optimum and maximum capacity are similar. However, ‘maximum’ does not take into account costs, while ‘optimum’ does.
Optimum capacity – example
Let’s suppose you have a factory that makes gloves. It can produce gloves at $3 per pair if it turns out 10,000 pairs per month.
However, if it operates at 100,000 pairs per month, it can produce them at $2 per pair. After that, no matter how high its production is, it cannot make them cheaper.
The optimum capacity of your glove factory is, therefore, when it makes them at $2 per pair.