Deck 5: Strategic Capacity Planning for Products and Services

Question 1

The expected monetary value approach is most appropriate when the decision maker is risk neutral.

Answer 1

True

Question 2

In reaching a decision, the alternative with the lowest cost should be ranked number 1.

Answer 2

False

Question 3

Among decision environments, risk implies that certain parameters have probabilistic outcomes.

Answer 3

True

Question 4

A weakness of the maximin approach is that it loses some information.

Question 5

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

Question 6

The expected value of perfect information is inversely related to losses predicted.

Question 7

If the unit cost to buy something is less than the variable cost to make it, the decision to make or buy is based solely on the fixed costs.

Question 8

The maximax approach is a pessimistic strategy.

Question 9

Decision trees, with their predetermined analysis of a situation, are really not useful in making health care decisions since every person is unique.

Question 10

The Laplace criterion treats states of nature as being equally likely.

Question 11

Among decision environments, uncertainty implies that states of nature have wide-ranging probabilities associated with them.

Question 12

Stating capacity in dollar amounts generally results in a consistent measure of capacity regardless of the actual units of measure.

Question 13

Design capacity refers to the maximum output rate that can be achieved under ideal conditions.

Question 14

In decision theory, states of nature refer to possible future conditions.

Question 15

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

Question 16

The maximin approach involves choosing the alternative with the highest payoff.

Question 17

Bounded rationality refers to the limits imposed on decision making because of costs, human abilities, time, technology, and/or availability of information.

Question 18

Expected monetary value gives the long-run average payoff if a large number of identical decisions could be made.

Question 19

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

Question 20

The maximin approach involves choosing the alternative that has the "best worst" payoff.

Question 21

Suppose a firm has decided to break its departments down into smaller units. While this likely will help with __________ issues, it raises the possibility that poor decisions will result due to __________.

A)risk aversion; suboptimization
B)economies of scale; risk aversion
C)span of control; suboptimization
D)span of control; risk aversion
E)economies of scale; limited span of control

Question 22

Capacity decisions often involve a long-term commitment of resources which, when implemented, are difficult or impossible to modify without major added costs.

Question 23

The more current capacity exceeds desired capacity, the greater the opportunity for profit.

Question 24

The current trend toward global operations has made capacity decisions much easier since we have the whole world in which to consider operations.

Question 25

Having excess capacity tends to keep operating costs low.

Question 26

According to the reading on restaurant sourcing practices, only fast-food restaurants are able to bring in outsourced foods.

Question 27

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

Question 28

Outsourcing some production is a means of supporting a constraint.

Question 29

The term "suboptimization" is best described as the:

A)result of individual departments making the best decisions for their own areas but hurting other areas.
B)limitations on decision making caused by costs and time.
C)result of failure to adhere to the steps in the decision process.
D)result of ignoring symptoms of the problem.
E)optimization on a micro level that extends to the macro level.

Question 30

Option A has an expected value of $2,000, a minimum payoff of −$4,000, and a maximum payoff of $18,000. Option B has an expected value of $2,200, a minimum payoff of −$1,000, and a maximum payoff of $6,000. Option C has an expected value of $1,900, a minimum payoff of $100, and a maximum payoff of $2,000. In this situation, a risk-averse decision maker would pay __________ for his risk aversion, and a risk-seeking decision maker would pay __________ for his risk seeking.

A)$200; $300
B)$1,100; $5,000
C)$300; $200
D)$2,100; $16,000
E)$400; $200

Question 31

Departmentalizing decisions increases the risk of __________ leading to a poor decision.

A)bounded rationality
B)suboptimization
C)risk aversion
D)misspecification
E)complexification

Question 32

In cost-volume analysis, costs that vary directly with volume of output are referred to as fixed costs because they are a fixed percentage of output levels.

Question 33

Capacity planning requires an analysis of needs: what kind, how much, and when.

Question 34

Increasing capacity just before a bottleneck operation will improve the output of the process.

Question 35

Waiting line analysis can be useful for capacity design, especially for service systems.

Question 36

A decision maker's worst option has an expected value of $1,000, and her best option has an expected value of $3,000. With perfect information, the expected value would be $5,000. The decision maker has discovered a firm that will, for a fee of $1,000, make her position-risk free. How much better off will her firm be if she takes this firm up on its offer?

A)$5,000
B)$4,000
C)$3,000
D)$2,000
E)$1,000

Question 37

Capacity increases are usually acquired in fairly large "chunks" rather than in smooth increments.

Question 38

A decision maker's worst option has an expected value of $1,000, and her best option has an expected value of $3,000. With perfect information, the expected value would be $5,000. What is the expected value of perfect information?

A)$5,000
B)$4,000
C)$3,000
D)$2,000
E)$1,000

Question 39

The break-even quantity can be determined by dividing the fixed costs by the difference between the revenue per unit and the variable cost per unit.

Question 40

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

Question 41

A tabular presentation that shows the outcome for each decision alternative under the various possible states of nature is called a:

A)payoff table.
B)feasible region.
C)Laplace table.
D)decision tree.
E)payback period matrix.

Question 42

Which of the following is not an approach for decision making under uncertainty?

A)decision trees
B)maximin
C)maximax
D)minimax regret
E)Laplace

Question 43

Determining the worst payoff for each alternative and choosing the alternative with the "best worst" is the approach called:

A)minimin.
B)maximin.
C)maximax.
D)minimax regret.
E)Laplace.

Question 44

If the minimum expected regret is computed, it indicates to a decision maker the expected:

A)value of perfect information.
B)payoff under certainty.
C)monetary value.
D)payoff under risk.
E)risk-seeking.

Question 45

Determining the average payoff for each alternative and choosing the alternative with the highest average is the approach called:

A)minimin.
B)maximin.
C)maximax.
D)minimax regret.
E)Laplace.

Question 46

Consider the following decision scenario:

*PV for profits ($000)
The minimax regret strategy would be:

A)buy.
B)lease.
C)rent.
D)high.
E)low.

Question 47

The range of probability for which an alternative has the best expected payoff can be determined by:

A)simulation.
B)sensitivity analysis.
C)priority recognition.
D)analysis of variance.
E)decision analysis.

Question 48

Consider the following decision scenario:

*PV for profits ($000)
The maximin strategy would be:

A)buy.
B)lease.
C)rent.
D)rent or lease.
E)buy low.

Question 49

The expected monetary value (EMV)criterion is the decision-making approach used with the decision environment of:

A)certainty.
B)risk.
C)uncertainty.
D)aversion.
E)neutrality.

Question 50

Which of the following characterizes decision making under uncertainty?

A)Decision makers must rely on probabilities in assessing outcomes.
B)The likelihood of possible future events is unknown.
C)Relevant parameters have known values.
D)Certain parameters have probabilistic outcomes.
E)Lack of knowledge about how risk-averse the decision maker is.

Question 51

The term "sensitivity analysis" is most closely associated with:

A)maximax.
B)maximin.
C)decision making under risk.
D)minimax regret.
E)Laplace criterion.

Question 52

The difference between expected payoff under certainty and expected payoff under risk is the expected:

A)monetary value.
B)value of perfect information.
C)net present value.
D)rate of return.
E)profit.

Question 53

The term "opportunity loss" is most closely associated with:

A)minimax regret.
B)maximax.
C)maximin.
D)expected monetary value.
E)Laplace.

Question 54

Consider the following decision scenario:

*PV for profits ($000)
The maximax strategy would be:

A)buy.
B)lease.
C)rent.
D)high.
E)low.

Question 55

A decision tree is:

A)an algebraic representation of alternatives.
B)a behavioral representation of alternatives.
C)a matrix representation of alternatives.
D)a schematic representation of alternatives.
E)limited to a maximum of 12 branches.

Question 56

The maximin approach to decision making refers to:

A)minimizing the maximum return.
B)maximizing the minimum return.
C)maximizing the minimum expected value.
D)choosing the alternative with the highest payoff.
E)choosing the alternative with the minimum payoff.

Question 57

Consider the following decision scenario:

*PV for profits ($000)
If P(high)is 0.60, the choice for maximum expected value would be:

A)buy.
B)lease.
C)rent.
D)high.
E)low.

Question 58

Sensitivity analysis is useful because:

A)payoffs and probabilities are estimates.
B)most decisions will affect employees.
C)expected payoffs are sensitive to the time value of money.
D)it is the second step in the decision model.
E)with the passage of time, small decisions get bigger.

Question 59

Which one of these is not used in decision making under risk?

A)EVPI
B)EMV
C)decision trees
D)minimax regret
E)All are used for risk situations.

Question 60

Which phrase best describes the term "bounded rationality"?

A)thinking a problem through clearly before acting
B)taking care not to exhaust limited resources
C)the result of departmentalized decision making
D)limits imposed on decision making by costs, time, and technology
E)the use of extremely structured steps in the decision-making process

Question 61

Consider the following decision scenario:

*PV for profits ($000)
The maximin strategy would be:

A)A.
B)B.
C)C.
D)D.
E)E.

Question 62

Consider the following decision scenario:

*PV for profits ($000)
With equally likely states of nature, the alternative that has the largest expected monetary value is:

A)A.
B)B.
C)C.
D)D.
E)E.

Question 63

The operations manager for a local bus company wants to decide whether he should purchase a small, medium, or large new bus for his company. He estimates that the annual profits (in $000)will vary depending upon whether passenger demand is low, medium, or high, as follows:

If he uses the Laplace criterion, which size bus will he decide to purchase?

A)small
B)medium
C)large
D)either small or medium
E)either medium or large

Question 64

Consider the following decision scenario:

*PV for profits ($000)
The maximax strategy would be:

A)A.
B)B.
C)C.
D)D.
E)E.

Question 65

Consider the following decision scenario:

*PV for profits ($000)
The maximin strategy would be:

A)small.
B)medium.
C)med.-large.
D)large.
E)ex-large.

Question 66

The new owner of a beauty shop is trying to decide whether to hire one, two, or three beauticians. She estimates that profits next year (in thousands of dollars)will vary with demand for her services, and she has estimated demand in three categories, low, medium, and high.

If she feels the chances of low, medium, and high demand are 50 percent, 20 percent, and 30 percent respectively, what is her expected value of perfect information?

A)$54,000
B)$65,000
C)$70,000
D)$80,000
E)$135,000

Question 67

Consider the following decision scenario:

*PV for profits ($000)
The maximin strategy would be:

A)small.
B)medium.
C)med.-large.
D)large.
E)ex-large.

Question 68

The new owner of a beauty shop is trying to decide whether to hire one, two, or three beauticians. She estimates that profits next year (in thousands of dollars)will vary with demand for her services, and she has estimated demand in three categories, low, medium, and high.

If she uses the Laplace criterion, how many beauticians will she decide to hire?

A)one
B)two
C)three
D)either one or two
E)either two or three

Question 69

The operations manager for a local bus company wants to decide whether he should purchase a small, medium, or large new bus for his company. He estimates that the annual profits (in $000)will vary depending upon whether passenger demand is low, medium, or high, as follows:

If he uses the minimax regret criterion, which size bus will he decide to purchase?

A)small
B)medium
C)large
D)either small or medium
E)either medium or large

Question 70

The new owner of a beauty shop is trying to decide whether to hire one, two, or three beauticians. She estimates that profits next year (in thousands of dollars)will vary with demand for her services, and she has estimated demand in three categories, low, medium, and high.

If she uses the minimax regret criterion, how many beauticians will she decide to hire?

A)one
B)two
C)three
D)either one or two
E)either two or three

Question 71

The operations manager for a local bus company wants to decide whether he should purchase a small, medium, or large new bus for his company. He estimates that the annual profits (in $000)will vary depending upon whether passenger demand is low, medium, or high, as follows:

If he feels the chances of low, medium, and high demand are 30 percent, 30 percent, and 40 percent respectively, what is the expected annual profit for the bus that he will decide to purchase?

A)$15,000
B)$61,000
C)$69,000
D)$72,000
E)$87,000

Question 72

The new owner of a beauty shop is trying to decide whether to hire one, two, or three beauticians. She estimates that profits next year (in thousands of dollars)will vary with demand for her services, and she has estimated demand in three categories, low, medium, and high.

If she feels the chances of low, medium, and high demand are 50 percent, 20 percent, and 30 percent respectively, what are the expected annual profits for the number of beauticians she will decide to hire?

A)$54,000
B)$55,000
C)$70,000
D)$50,000
E)$154,000

Question 73

The operations manager for a local bus company wants to decide whether he should purchase a small, medium, or large new bus for his company. He estimates that the annual profits (in $000)will vary depending upon whether passenger demand is low, medium, or high, as follows:

If he uses the maximin criterion, which size bus will he decide to purchase?

A)small
B)medium
C)large
D)either small or medium
E)either medium or large

Question 74

The operations manager for a well-drilling company must recommend whether to build a new facility, expand his existing one, or do nothing. He estimates that long-run profits (in $000)will vary with the amount of precipitation (rainfall)as follows:

If he uses the Laplace criterion, which alternative will he decide to select?

A)do nothing
B)expand
C)build new
D)either do nothing or expand
E)either expand or build new

Question 75

The new owner of a beauty shop is trying to decide whether to hire one, two, or three beauticians. She estimates that profits next year (in thousands of dollars)will vary with demand for her services, and she has estimated demand in three categories, low, medium, and high.

If she uses the maximax criterion, how many beauticians will she decide to hire?

A)one
B)two
C)three
D)either one or two
E)either two or three

Question 76

The operations manager for a well-drilling company must recommend whether to build a new facility, expand his existing one, or do nothing. He estimates that long-run profits (in $000)will vary with the amount of precipitation (rainfall)as follows:

If he uses the maximax criterion, which alternative will he decide to select?

A)do nothing
B)expand
C)build new
D)either do nothing or expand
E)either expand or build new

Question 77

Consider the following decision scenario:

*PV for profits ($000)
If yes and no are equally likely, which alternative has the largest expected monetary value?

A)small.
B)medium.
C)med.-large.
D)large.
E)ex-large.

Question 78

The operations manager for a local bus company wants to decide whether he should purchase a small, medium, or large new bus for his company. He estimates that the annual profits (in $000)will vary depending upon whether passenger demand is low, medium, or high, as follows:

If he feels the chances of low, medium, and high demand are 30 percent, 30 percent, and 40 percent respectively, what is his expected value of perfect information?

A)$15,000
B)$61,000
C)$69,000
D)$72,000
E)$87,000

Question 79

Consider the following decision scenario:

*PV for profits ($000)
The minimax regret strategy would be:

A)A.
B)B.
C)C.
D)D.
E)E.

Question 80

Consider the following decision scenario:

*PV for profits ($000)
The maximax strategy would be:

A)small.
B)medium.
C)med.-large.
D)large.
E)ex-large.