What happens when the company’s production is challenged which would require to them produce more than 100% of its capacity?
Answers
Explanation:
CORPORATE FINANCE & ACCOUNTING ACCOUNTING
Excess Capacity
By CARLA TARDI
Updated May 10, 2020
What Is Excess Capacity?
Excess capacity is a condition that occurs when demand for a product is less than the amount of product that a business could potentially supply to the market. When a firm is producing at a lower scale of output than it has been designed for, it creates excess capacity.
The term excess capacity is generally used in manufacturing. If you see idle workers at a production plant, it could imply that the facility has excess capacity. However, excess capacity can also apply to the service sector. In the restaurant industry, for example, there are establishments that chronically have empty tables, along with a staff that appears unproductive. This inefficiency indicates that the venue can accommodate more guests, but that the demand for that restaurant is not equal to its capacity.
KEY TAKEAWAYS
Excess capacity exists when the market demand for a product is less than the volume of product that a company could potentially supply.
The term excess capacity pertains mainly to manufacturing, but it's also used in the services sector.
Excess capacity can indicate healthy growth, but too much excess capacity can hurt an economy.
What Causes Excess Capacity?
Some factors that can cause excess capacity are overinvestment, repressed demand, technological improvement, and external shocks—such as a financial crisis—among other components. Excess capacity can also arise from mispredicting the market or by allocating resources inefficiently. To remain healthy and financially balanced, a company's management needs to stay attuned to the realities of supply and demand.