Tolerance design has been identified as an important research area and a number of models have been proposed in the literature. This paper investigates the effect of limited capacity on tolerance design for products with nominal-the-best type (N-type) quality characteristics. The model is developed under the assumption that the reprocessed and nonreprocessed items are produced by the same manufacturing process and therefore their quality characteristics are identically and independently distributed. Profit models are constructed which involve four price/cost components; selling price, cost incurred by imperfect quality, reprocessing and quality inspection costs. Methods of finding the optimal tolerance limits are presented, and a numerical example is given. Sensitivity analyses are also performed to study the effect of a process standard deviation on this model.