Capacity planning is the process of determining the production capacity needed by an organization to meet changing demands for its products. In the context of capacity planning, design capacity is the maximum amount of work that an organization is capable of completing in a given period. Effective capacity is the maximum amount of work that an organization is capable of completing in a given period due to constraints such as quality problems, delays, material handling, etc (Wikipedia).
The broad classes of capacity planning are lead strategy, lag strategy, match strategy, and adjustment strategy.
Advantage of lead strategy: First, it ensures that the organization has adequate capacity to meet all demand, even during periods of high growth. This is especially important when the availability of a product or service is crucial, as in the case of emergency care or hot new product. For many new products, being late to market can mean the difference between success and failure. Another advantage of a lead capacity strategy is that it can be used to preempt competitors who might be planning to expand their own capacity. Being the first in an area to open a large grocery or home improvement store gives a retailer a define edge. Finally many businesses find that overbuilding in anticipation of increased usage is cheaper and less disruptive than constantly making small increases in capacity. Of course, a lead capacity strategy can be very risky, particularly if demand is unpredictable or technology is evolving rapidly.
Fixed costs are the expenses an organization incurs regardless of the level of business activity. Variable costs are expenses directly tied to the level of business activity.
TC = FC + (VC * X), where X=amount of business activity
The indifference point is the output level at which two capacity alternatives generate equal costs.
You can calculate the indifferent point by setting the two cost functions for two alternatives equal to each other and solving for X.
FC1 + (VC1 * X) = FC2 + (VC2 * X)
Indifference Point (X) = (FC2 - FC1) / (VC1 - VC2)
Break-even (or break even), often abbreviated as B/E in finance, is the point of balance making neither a profit nor a loss (Wikipedia).
BEP = (FC) / (R – VC)
where R = revenue per unit of business activity