06 - Capacity Planning for Products and services (Ch 05) - Q&A PDF

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Book Name: Operations Management - Stevenson - 11th Edition
Chapter 5 (Capacity Planning for Products and services)
Materials Type: Practice...

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Capacity Planning for Products and Services DR. ALY ELSHEKH

1. Essay Questions Discuss the key questions need to be answered before planning capacity 1. What kind of products or services is needed? 2. How much capacity is needed to match demand? 3. When is it needed? 4. How much will it cost, how will it be funded, and what is the expected return? 5. What is the degree of uncertainty related to forecasts of the amount of demand and the rate of change in demand? 6. Should capacity be changed all at once, or through several (or more) small changes? 7. Can the supply chain handle the necessary changes? ……………………………………………………………………………………………………………… Explain the importance of capacity planning. 1. Meet future demands for products and services Xbox in late 2005, there were insufficient supplies, resulting in lost sales and unhappy customers. 2. Initial cost the greater the capacity of a productive unit, the greater its cost. 3. Operating costs costs of over- and under-capacity. 4. long-term commitment costs once long-term commitment of resources is implemented, those decisions may be difficult or impossible to modify without incurring major costs. 5. Competitiveness If a firm has excess capacity, or can quickly add capacity, this fact may lead to barrier to entry by other firms, and the delivery speed 6. Ease of Management having appropriate capacity makes management easier than when capacity is mismatched. ……………………………………………………………………………………………………………… Describe ways of defining and measuring capacity. Design capacity maximum output rate or service capacity an operation, process, or facility is designed for Effective capacity Design capacity minus allowances such as personal time, maintenance, and scrap

Actual output rate of output actually achieved. cannot exceed effective capacity. ……………………………………………………………………………………………………………… Name several determinants of effective capacity. 1. Facilities The design of facilities, including room for expansion, layout of the work area, and environmental factors such as heating, lighting, and ventilation also play a significant role in determining whether personnel can perform effectively or whether they must struggle to overcome poor design characteristics. 2. Product and service factors For example, when items are similar, the ability of the system to produce those items is generally much greater than when successive items differ. 3. Process factors if quality of output does not meet standards, the rate of output will be slowed by the need for inspection and rework activities. 4. Human factors 5. Policy factors overtime or second or third shifts. 6. Operational factors Inventory shortages of even one component of an assembled item can cause a temporary halt to assembly operations 7. Supply chain factors If capacity will be increased, will these elements of the supply chain be able to handle the increase? 8. External factors Pollution standards on products and equipment often reduce effective capacity

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2. True / False Questions Question

T/F

Explanation

1. The term capacity refers to the maximum quantity an operating unit can process over a given period of time.

T

2. Capacity decisions are usually one-time decisions; once they have been made, we know the limits of our operations.

F

A number of factors can either increase or reduce a unit's capacity over time.

3. Design capacity refers to the maximum output that can possibly be attained.

T

Design capacity is only reachable under ideal conditions.

4. Increasing productivity and also quality will result in increased capacity.

T

Effective capacity can be increased over time by these and similar factors.

5. Utilization is defined as the ratio of effective capacity to design capacity.

F

Utilization is the ratio of output to design capacity.

6. An example of an external factor that influences effective capacity is government safety regulations.

T

Stricter safety regulations can reduce effective capacity.

3. Problems

Problem 1: What is the break-even quantity for the following situation? FC = $1,200 per week VC = $2 per unit Rev = $6 per unit

Solution: Break-even at profit = 0 0 = Q(R – v) - FC Q(R – v) = FC Q x 4 = 1,200 Q = 300 ………………………………………………………………………………………………………………

Problem 2: An alternative will have fixed costs of $10,000 per month, variable costs of $50 per unit, and revenue of $70 per unit. The break-even point volume is:

Solution: Break-even at profit = 0 0 = Q(R – v) - FC Q(R – v) = FC Q x 20 = 10,000 Q = 500 ………………………………………………………………………………………………………………

Problem 3: An investment proposal will have annual fixed costs of $60,000, variable costs of $35 per unit of output, and revenue of $55 per unit of output. a) Determine the break-even quantity. b) What volume of output will be necessary for an annual profit of $60,000?

Solution: a) Break-even at profit = 0 0 = Q(R – v) - FC Q(R – v) = FC Q x 20 = 60,000 Q = 3000 b) P = Q(R – v) – FC 60,000 = Q x 20 – 60,000 120,000 = Q x 20 Q = 6,000 ………………………………………………………………………………………………………………

Problem 4: A firm is considering three capacity alternatives: A, B, and C. Alternative A would have an annual fixed cost of $100,000 and variable costs of $22 per unit. Alternative B would have annual fixed costs of $120,000 and variable costs of $20 per unit. Alternative C would have

fixed costs of $80,000 and variable costs of $30 per unit. Revenue is expected to be $50 per unit. a) Which alternative has the lowest break-even quantity? b) Which alternative will produce the highest profits for an annual output of 10,000 units? c) Which alternative would require the lowest volume of output to generate an annual profit of $50,000?

Solution: a) QA = 100,000 / 28 = 3,572 QB = 120,000 / 30 = 4,000 QC = 80,000 / 20 = 4,000 b) PA = 50 x 10,000 – (100,000 + 22 x 10,000) = 180,000 PB = 50 x 10,000 – (120,000 + 20 x 10,000) = 180,000 PC = 50 x 10,000 – (80,000 + 30 x 10,000) = 120,000 c) For A, 50,000 = 50Q – (100,000 + 22Q) = 28Q – 100,000 28Q = 150,000 QA = 5,358 For B, 50,000 = 50Q – (120,000 + 20Q) = 30Q – 120,000 30Q = 170,000 QB = 5,667 For C, 50,000 = 50Q – (80,000 + 30Q) = 20Q – 80,000 20Q = 130,000 QC = 6,500 ………………………………………………………………………………………………………………

Problem 5: A small business owner is contemplating the addition of another product line. Capacity increases and equipment will result in an increase in annual fixed costs of $50,000. Variable costs will be $25 per unit. a) What unit selling price must the owner obtain to break-even on a volume of 2,500 units a year? b) Because of market conditions, the owner feels a revenue of $47 is preferred to the value determined in part a. What volume of output will be required to achieve a profit of $16,000 using this revenue?

Solution: a) P = Q(R – v) – FC 0 = 2500(R – 25) – 50,000

0 = 2500R – 62,500 – 50,000 2500R = 112,500 R = 45 b) P = Q(R – v) – FC 16,000 = Q(47 – 25) – 50,000 22Q = 66,000 Q = 3,000 ………………………………………………………………………………………………………………

Problem 6: The efficiency of a productive unit is 60%. The unit produces an average of 20 forklift trucks per day. Determine the effective capacity of the unit.

Solution: ActualOutput Effective Output 60 20 = Effective Output 100 Effective Output x 60 = 20 x 100 2000 = 33.33 trucks Effective Output = 60 ……………………………………………………………………………………………………………… Efficiency =

Problem 7: The utilization of a machine is 50%. The machine has a design capacity of 70 units per hour and an effective capacity of 60 units per hour. Find the efficiency of the machine.

Solution: Actual Output Design Capacity Actual Output 50 = 100 70 Actual Output = 35

Utilization =

Efficiency =

Actual Output Effective Capacity

Efficiency =

35 60

= 58.3 %

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Problem 8: The owner of Firewood To Go is considering buying a hydraulic wood splitter which sells for $50,000. He figures it will cost an additional $100 per cord to purchase and split wood with this machine, while he can sell each cord of split wood for $125.

a) What would the potential profit be if he were to split 4,000 cords of wood with this machine? b) How many cords of wood would he have to split with this machine to break even? c) How many cords of wood would he have to split with this machine to make a profit of $30,000? d) If for this machine, design capacity is 50 cords per day, effective capacity is 40 cords per day, and actual output is anticipated to be 35 cords per day, what would be its utilization? e) If, for this machine, design capacity is 50 cords per day, effective capacity is 40 cords per day, and actual output is expected to be 32 cords per day, what would be its efficiency?

Solution: a) P = Q(R – v) – FC = 4,000(125 – 100) – 50,000 = 100,000 – 50,000 = 50,000 b) 0 = Q(R – v) – FC 0 = Q(25) – 50,000 50,000 = Q(25) Q = 2,000 c) 30,000 = Q(R – v) – FC 30,000 = Q(25) – 50,000 80,000 = Q(25) Q = 3,200 Actual Output d) Utilization = Design Capacity 35 Utilization = = 70% 50 e) Efficiency =

Actual Output Effective Capacity

32 = 80 % 40 ……………………………………………………………………………………………………………… Efficiency =

Problem 9: The owner of a greenhouse and nursery is considering whether to spend $6,000 to acquire the licensing rights to grow a new variety of rosebush, which she could then sell for $6 each. Perunit variable cost would be $3. a) What would the profit be if she were to produce and sell 5,000 rosebushes? b) How many rosebushes would she have to produce and sell in order to break even? c) How many rosebushes would she have to produce and sell in order to make a profit of $6,000?

d) If her available land has design and effective capacities of 3,000 and 2,000 rosebushes per year respectively, and she plans to grow 1,200 rosebushes each year on this land, what will be the utilization of this land? e) If her available land has design and effective capacities of 3,000 and 2,000 rosebushes per year, respectively, and she expects to be 80% efficient in her use of this land, how many rosebushes does Rose plan to grow each year on this land?

Solution a) P = Q(R – v) – FC = 5,000(6 – 3) – 6,000 = 9,000 b) 0 = Q(R – v) – FC 6,000 = Q x 3 Q = 2,000 c) 6,000 = Q(R – v) – FC = Q (3) – 6,000 12,000 = 3Q Q = 4,000 d) Utilization = Utilization =

e) Efficiency = 80 100

=

Actual Output Design Capacity 1200 = 40% 3000 Actual Output Effective Capacity Actual Output 2000

Actual Output = 1600 ………………………………………………………………………………………………………………

Problem 10: A firm’s manager must decide whether to make or buy a certain item used in the production of vending machines. Making the item would involve annual lease costs of $150,000. Cost and volume estimates are as follows:

a) Given these numbers, should the firm buy or make this item? b) There is a possibility that volume could change in the future. At what volume would the manager be indifferent between making and buying?

Solution: a) Determine the annual cost of each alternative: TC = FC + Qv TCMake = 150,000 + 12,000 x 60 = 870,000 TCBuy = 0 + 12,000 x 80 = 960,000 Because the annual cost of making the item is less than the annual cost of buying it, the manager would reasonably choose to make the item. b) To determine the volume at which the two choices would be equivalent, set the two total costs equal to each other and solve for volume: TCMake = TCBuy 150,000 + Q x 60 = Q x 80 150,000 = Q x 20 7,500 = Q ………………………………………………………………………………………………………………

Problem 11: A small firm produces and sells automotive items in a five-state area. The firm expects to consolidate assembly of its battery chargers line at a single location. Currently, operations are in three widely scattered locations. The leading candidate for location will have a monthly fixed cost of $42,000 and variable costs of $3 per charger. Chargers sell for $7 each. The monthly volume is 10,000 units. a) Calculate the total profits and the total costs. b) What is the break-even point? Given: Revenue = $7 VC = $3 FC = $42,000

Solution: a) Profit = Q(R-v) – FC = 10,000 x 4 – 42,000 = -2,000$ TC = FC + Qv = 42,000 + 10,000 x 3 = 72,000 b) The break-even point at profit = 0 Q(R-v) = FC Q x 4 = 42,000 Q = 10,500 units

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Problem 12: A manager must decide which type of equipment to buy, Type A or Type B. Type A equipment costs $15,000 each, and Type B costs $11,000 each. The equipment can be operated eight hours a day, 250 days a year. Either machine can be used to perform two types of chemical analysis, C1 and C2. Annual service requirements and processing times are shown in the following table. Which type of equipment should be purchased, and how many of that type will be needed? The goal is to minimize total purchase cost.

Solution: Annual working hours = 8 hours/day x 250 days/year = 2,000 hr Machine A = 1,200 + 900 x 3 = 3,900 hr Machine B = 1,200 x 2 + 900 x 2 = 4,200 hr Hence, one piece can handle 2,000 hours of analysis, two pieces of equipment can handle 4,000 hours, and so on. Given the total processing requirements, two of Type A would be needed, for a total cost of 2 _ $15,000 _ $30,000, or three of Type B, for a total cost of 3 _ $11,000 _ $33,000. Thus, two pieces of Type A would have sufficient capacity to handle the load at a lower cost than three of Type B. ………………………………………………………………………………………………………………...