This dialog allows you to set the number of bits per code used for compression. It does not apply to already compressed files; these must be decompressed with the same number of bits as they were compressed with (handled automatically).
ΓÇó More bits require more RAM, therefore if you are moving the compressed file to a machine with limited memory, you should set the bits parameter to something appropriate. Even a 512K Mac can deal with 16 bits/code, I believe, though I don't have one available for testing.
ΓÇó More bits result in faster and greater compression than fewer bits.
MacCompress will dim the choices for which there is too little available memory.