Notes:

The term capacity implies an attainable rate of output but says nothing about how long that rate can be sustained. Thus, if we say that a given plant has a capacity of x units, we do not know if this is a one-day peak or a six-month average. To avoid this problem, the concept of best operating level is used. This is the level of capacity for which the process was designed and thus is the volume of output at which average unit cost is at a minimum. When the output of the facility falls below this level (underutilization), average unit cost will increase as overhead must be allocated to fewer units. Above this level (overutilization), average unit cost also increases—here due to overtime, increased equipment wear, and heightened defect rates.