Certified Production & Operations Manager (POM) Practice Exam

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What does an effective capacity of 2000 units imply if the actual output is 1200 units?

It is at full capacity
It is underutilized
It is over capacity
It indicates potential for improvement

The correct answer is: It is underutilized

The concept of effective capacity refers to the maximum output that a production process can achieve under normal operating conditions, accounting for usual delays, maintenance, and inefficiencies. When the effective capacity is stated to be 2000 units, it means that the process has the potential to produce up to this number of units if everything operates smoothly. Given that the actual output is 1200 units, which is significantly lower than the effective capacity of 2000 units, it indicates that the production process is not utilizing its full potential. This situation is characterized as underutilization since the actual output is only 60% of what could potentially be produced. Understanding this concept is crucial because it highlights inefficiencies in the production process that could be addressed to improve overall performance. Factors leading to underutilization might include machine downtime, labor shortages, or suboptimal production scheduling, all of which could be investigated and improved to increase output closer to effective capacity. Thus, the correct interpretation of this scenario aligns with the assessment that the operation is underutilized.