Exam 4: Capacity Planning

Scenario 4.7 The B. Sharp Company has a rapidly growing product line that requires two work centers, X and Y for manufacture. Work Center X has a current capacity of 50,000 units per year, and Work Center Y is capable of 55,000 units per year. This year (year 0), sales of the product line are expected to reach 50,000 units. Growth is projected at an additional 3,000 units each year through year 3. Pre-tax profits are expected to be $60 per unit throughout the 3-year planning period. Two alternatives are being considered:1) Expand both Work Centers X and Y at the end of year 0 to a capacity of 60,000 units per year, at a total cost for both Work Centers of $500,000; 2) Expand Work Center X at the end of year 0 to 55,000 units per year, matching Work Center Y, at a cost of $300,000, then expanding both Work Centers to 60,000 units per year at the end of year 2, at an additional cost at that time of $350,000. The Sharp Company will not consider projects that don't show a 3rd year positive net present value using a discount rate of 20%. -Use the information in Scenario 4.7. What action, if any, should the Sharp Company take?

Input measures of capacity are inherently more accurate than output measures of capacity.

The single milling machine at Fred's Manufacturing was severely overloaded last year. The plant operates 8 hours per day, 5 days per week, and 50 weeks per year. Management prefers a capacity cushion of 20 percent. Two major types of products are routed through the milling machine. The annual demand for product A is 4,000 units and 3,000 units for product B. The batch size for A is 20 units and 30 units for B. The standard processing time for A is 0.5 hours/unit and 0.8 for B. The standard setup time for product A is 2 hours and 8 hours for product B. How many new milling machines are required if Fred's does not resort to any short-term capacity options?

The Northern Manufacturing Company is producing products A and B, using the same machine called MASAC27A. Demand forecasts for next year and other production-related information are provided in the following table. The company works 250 days per year and operates 2 shifts each day, each shift covering 8 hours. If 25 percent of capacity cushion is maintained throughout the year, how many machines (MASAC27A) does the company need next year to meet the demand? (Round your answer up to the next whole machine.)

Capacity can be expressed by output or input measures.

A manufacturing plant is capable of producing 10 tons of product per day when it runs three shifts with no breakdowns and plenty of raw materials. Over the past week, the plant has produced an average of 7.3 tons per day since the third shift has devoted much of their time to preventive maintenance. What is the capacity of the plant?

One of the many steps in the production of toothpaste is to screw the caps on the tubes, which is still a manual process, performed by one man, Mr. Bucket. Which statement about this situation is best?

The single milling machine at Stout Manufacturing was severely overloaded last year. The plant operates eight hours per day, five days per week, and 50 weeks per year. Management prefers a capacity cushion of 15 percent. Two major types of products are routed through the milling machine. The annual demand for product A is 3,000 units and 2,000 units for product B. The batch size for A is 20 units and 40 units for B. The standard processing time for A is 0.5 hours/unit and 0.8 hours/unit for B. The standard setup time for product A is 2 hours and 8 hours for product B. How many new milling machines are required if Stout does not resort to any short-term capacity options?

Lucy's Pancake House, a no-frills diner along a major interstate, has discovered that if precious employee time is not wasted on frivolous duties such as cleaning work surfaces, properly storing ingredients, and pest control, they can achieve an average output rate of 25 customers per hour. If the diner was designed to accommodate a maximum of 30 customers per hour, what is the utilization?

Burdell Labs is a diagnostic laboratory that does various tests (blood tests, urine tests, etc.) for doctors' offices in the Indianapolis area. Test specimens are picked up at the doctors' offices and are transported to the testing facility, with uniform arrivals throughout the day. All tests go through two testing centers in the testing facility, Test Center A and Test Center B. A has a current capacity of 1,000 units per week, and B is capable of 1,500 units per week. The facility operates 50 weeks per year. This year (year 0), test volumes are expected to reach 1,000 units per week. Growth is projected at an additional 200 units each week through year 5 (i.e., 1,200 per week in year #1, 1,400 per week in year #2, etc.). Pre-tax profits are expected to be $5 per test throughout the 5-year planning period. Two alternatives are being considered: 1) Expand both Test Centers A and B at the end of year 0 to a capacity of 2,000 units per week, at a total cost for both Test Centers of $300,000; 2) Expand Test Center A at the end of year 0 to 1,500 units per week, matching Test Center B, at a cost of $100,000, then expanding both Test Centers to 2,000 units per year at the end of year 3, at an additional cost at that time of $250,000. Burdell Labs will not consider projects that don't show a 5th year positive net present value using a discount rate of 15%. What are the pre-tax cash flows for the two alternatives compared to the base case of doing nothing for the next five years, and what action, if any, should Burdell take?

It takes a service rep an average of two minutes to take a customer's information. Over the course of a work week, the rep handles 160 calls a day during her eight hour shift. What is the service rep's capacity cushion?

Capacity decisions should be linked closely to ________ and ________ throughout the organization.

George P. Burdell owns a hot tub store that is experiencing significant growth. Burdell is trying to decide whether to expand the store's capacity, which currently is at $750,000 in sales per quarter. He is thinking about expanding to the $850,000 level. The before-tax profit from additional sales is 20 percent. Sales are seasonal, with peaks in the spring and summer quarters. Forecasts of capacity requirements, expressed in ($000) sales per quarter, for next year (year 2) are: Demand in year 3 and beyond is expected to exceed $850,000 per quarter. Burdell is considering expansion at the end of the fourth quarter of this year (year 1). How much would before-tax profits in year 2 increase because of this expansion?

Diseconomies of scale is a concept that states that the average unit cost of a service or good can be reduced by increasing its output rate.

Discuss the relationship between setup time and utilization.

A standard work year is 2,080 hours at the Luther Mill and it takes about 2 hours to fill a customer order. The manager at the mill is always concerned about employee idle time, so he aims for a capacity cushion of two percent. Last year saw 15,000 customer orders at the mill and the manager has a new Mercedes in mind as a company car, so he hopes that there is an increase of 10% in customer orders for next year. How many workers will the manager need to have at the mill next year?

John Owen owns a drugstore that is experiencing significant growth. Owen is trying to decide whether to expand its capacity, which currently is $200,000 in sales per quarter. Sales are seasonal. Forecasts of capacity requirements, expressed in sales per quarter for the next year, follow. Owen is considering expanding capacity to the $250,000 level in sales per quarter. The before-tax profit margin from additional sales is 15 percent. How much would before-tax profits increase next year because of this expansion?

Give four principal reasons economies of scale can occur when output increases. Provide examples of each for a service firm.

Large, infrequent jumps in capacity are characteristic of companies that:

Capacity cushions may be lowered if companies smooth the output rate by raising prices when inventory is low and decreasing prices when it is high.