Is capacity utilization likely to matter to the success of the new factory?

• A. No, capacity utilization is irrelevant.
• B. Utilization affects only marketing outcomes.
• C. Yes, because low utilization wastes fixed costs while overuse can cause bottlenecks and quality problems.
• D. Only labor costs matter.

Answer: (C)

Capacity utilization matters because it directly affects costs and how smoothly production runs. A new factory has high fixed costs, so using capacity well is crucial: if utilization is too low, those fixed costs are spread over fewer units, making the average cost per unit higher and hurting profitability. On the flip side, running too close to or at full capacity can create bottlenecks, longer lead times, higher wear and tear on machinery, more overtime, and a greater risk of quality problems, all of which can damage delivery reliability and costs. So, appropriate utilization helps keep costs down while maintaining quality and timing.

It's not just about marketing or labor costs. Utilization influences the whole production system, including maintenance, downtime, and defect rates, and it determines how well the factory can meet demand without unnecessary expense.