Why is the capacity decision important?

The capacity decision is important for several reasons. First, capacity costs represent a large portion of fixed costs. Second, a facility of the wrong size means that costs are not as low as they could be. If a facility is too large, and portions of it remain idle, the firm's costs are too high because of the higher fixed costs. If a plant is too small, costs are again higher than they might be due to inefficiencies of working in cramped and crowded spaces. Further, a facility too small may lead to lost sales, perhaps even lost markets.