What is Theoretical Capacity?

Theoretical capacity is the amount of throughput that could be attained if a production facility were able to produce at its peak efficiency level with no downtime. Theoretical capacity should not be used for planning or bonus compensation purposes, since it is nearly impossible to attain in practice. Many factors can interfere with the ability of a facility to attain its theoretical capacity, including scheduled and unscheduled maintenance, raw material and labor shortages, equipment replacements, power failures, flooding and earthquakes.

Example of Theoretical Capacity

Grizzly Golf Carts produces golf carts for oversized golfers. When its production line is running at its theoretical capacity, it can produce 120 golf carts per day. The calculation of its theoretical capacity is as follows:

It runs three shifts per day, at 40 carts produced per shift (or five carts per hour)
All component parts are on hand when production begins
The production line is fully staffed

In reality, Grizzly has never attained this production figure, for the following reasons:

It cannot find enough qualified staff for its production line, so at least one-quarter of the staff is under-trained, resulting in four fewer carts being produced in each shift.
The production line is down at least one hour per day for scheduled and unscheduled maintenance.
The production line is stopped for ten minutes, once an hour for employee breaks.
The production line is paused for twelve minutes at the end of each shift, so that the workers can transition to a new shift.

Given these issues, Grizzly produces 40 fewer carts per day, for the following reasons:

12 fewer carts due to staff under-training
5 fewer carts due to maintenance down time
20 fewer carts due to employee breaks
3 fewer carts due to shift change-overs

The downtime issues noted here, which are realistic for many production lines, highlights the significant difference between theoretical capacity and what a business can actually produce. The difference can be substantial.