Adding a USB drive to the Time Capsule will not increase the capacity of the Time Capsule.....you will have two separate drives....the Time Capsule and the Bufffalo drive.
You might not be aware, but the USB port on the Time Capsule is only USB 2.0.....not a higher speed USB 3.0 port.....and even more significantly, due to processor limitations in the Time Capsule, the USB 2.0 port runs at only about half the speed of a USB 2.0 port on a computer.
So, things are going to be really slow if you do connect a USB drive to the Time Capsule.
Mac OS Extended (Journaled) is the preferred format for Macs, and should be used if at all possible. Otherwise, use FAT32.
I haven't tried the Buffalo Drive that you mention, but other USB drives that I have tried all suffer from the very slow speeds of the USB port on the Time Capsule, so while what you propose would technically "work", I would not really recommend this. But, the bottom line here is that you will not know how well this works for you, until you try it out on your network.
I'm assuming that the Buffalo drive has a USB 3.0 port, so if you could connect that drive directly to a Mac with a USB 3.0, performance would be 4-5 times faster.
The USB drive on the Time Capsule was really designed so that you can back up the contents on the Time Capsule to the USB drive........very slowly.
