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Capacity Expansion:

Capacity Expansion:

                Capacity expansion is a process in which a business firm decides to expand its capacity or not for the future time beings, for the long runs a firm can continue its business with the same capacity or the management need to make some changes in it? These are the key question which needs very sharp strategic eyed decisions.

Capital always is an issue for the business firms. The Capacity of a firm production always is decided with their capital investments. That’s the reason every business process needs a very effective and efficient capital capacity planning which helps them with the real time information.

Normally for the long run, the customer demands, and their behaviors problems and for the strategic issue, the market segment and product users and industrial market overcapacity are the issues and problems which are needed to address. In ordinary cases the firms trying to deal with the under capacity and overcapacity issues.

In short run, the under capacity tends to profitability and for a long run the company has more time to adjust all the balances and it's productions levels so the overcapacity issue helps the company there in the capacity expansion.

The Capital budget of a business firm also helps the firm’s management to make the decision about the capacity expansion. The Capital budget is a financial document which helps the business management to understand all the investment and financial needs of the business. The Cash flow of a business helps the management to understand that how and where the cash of the business will be used. The other financial ratios like the profitability ratios, present and future value of the money. These all financial key figures and methods help the business management to understand their financial situation and market information for the making of the expansion in their business production capacity.


The business firms need to deal efficiently and effectively with the uncertainty about the future and needs to do more work on R&D for that purpose. The use of the practical capacity helps the business firms in capital budgeting and in cost allocation like the factory overhead costs allocation.

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