Deck 6: Capacity Planning

Question 1

Capacity is any amount of output that a system can produce in a given period of time.

Answer 1

False

Question 2

Capacity planning is the process by which firms determine the amount of output to store or hold.

Answer 2

False

Question 3

Capacity planning is the same as capacity management.

Answer 3

False

Question 4

Capacity planning is a strategic task while capacity management is a tactical activity.

Question 5

Design capacity is the maximum theoretical output of a system in a given period of time.

Question 6

Effective capacity is the capacity of the resource under normal operating conditions.

Question 7

Potential capacity is the capacity that can be made available in the near future.

Question 8

Capacity utilization is the amount of effective capacity that is utilized on average in fulfilling demand.

Question 9

Capacity utilization always exceeds design capacity.

Question 10

Efficiency is the amount of effective capacity that is utilized on average in fulfilling demand.

Question 11

Utilization in services is usually high because of variability in customer arrivals.

Question 12

Design capacity may be increased by identifying and reducing bottlenecks.

Question 13

Capacity planning is important to businesses primarily for profit generation.

Question 14

Excess capacity is always better for the business than too little capacity.

Question 15

Higher contribution margins lead firms to invest in higher capacity, even with low capacity utilization expectations.

Question 16

Lower margin products or services do not benefit from additional capacity.

Question 17

The greater the uncertainty and the fluctuation, the greater the need for capacity availability.

Question 18

Capacity utilization should always aim to be 100 percent.

Question 19

A capacity gap analysis identifies net capacity requirements.

Question 20

Break-even analysis and decision tree analysis are major tools for capacity planning.

Question 21

Break-even analysis identifies the maximum profit that can be achieved.

Question 22

Break-even analysis identifies the volume at which variable costs and revenues are equal.

Question 23

NPV analysis determines the capacity plan that would turn a profit in terms of the net difference between current investment and the present values of future cash flows.

Question 24

Chase and level strategies are the only two ways to align capacity to demand.

Question 25

An expansionist strategy is the best to pursue when forecasting indicates demand growth.

Question 26

KPIs (key performance indicators) of successful capacity planning would include both efficiency and customer-facing metrics.

Question 27

Poor capacity planning can result in shortages or surpluses.

Question 28

Capacity planning only applies to the manufacturing industry.

Question 29

A limitation of the net present value approach to capacity planning is that actual interest rates may be different than assumed interest rates.

Question 30

Capacity planning in services employs a mix of capacity management and demand management.

Question 31

Sustainable capacity planning adheres to the triple bottom line of ‛people, planet, and profit.'

Question 32

Capacity is

A) the maximum output of a system in a given time period
B) the minimum output of a system in a given time period
C) the amount of time needed to produce output
D) none of the above

Question 33

Capacity planning is

A) anticipating and arranging for capacity needs to provide satisfactory service levels to the consumer
B) a strategic task
C) minimizing the discrepancy between demand and capacity
D) all of the above

Question 34

Effective capacity is the

A) average output that can be achieved under worst-case conditions
B) best operating capacity of the resource that can be sustained under normal operating conditions
C) maximum output of a system in a given period
D) none of the above

Question 35

Which of the following could be an appropriate approach to demand management in the service sector when demand and capacity are mismatched?

A) higher prime time pricing
B) off-peak price incentives
C) reservations
D) all of the above

Question 36

Efficiency will usually be greater than utilization because

A) Design capacity is less than effective capacity.
B) Design capacity is greater than effective capacity.
C) Design capacity equals rated capacity.
D) Effective capacity equals design capacity.

Question 37

The Baruch Academic Computing Center has five technicians available in its computer labs to provide orientation training sessions to students. The design capacity of the system is 1,800 students per semester and the effective capacity equals 80 percent of design capacity. If the number of students who actually go to their orientation session is 1,200, what is the efficiency of the system?

A) 66.7%
B) 1,440 students
C) 83.3%
D) 960 students

Question 38

A computer glitch (of all things) was discovered at The Baruch Academic Computing Center, and it was determined that only 1,150 students were actually served. If the design capacity of the system is 1,800 students per semester and the highest number of students who can actually go to their orientation session is 1,200, what is the utilization and efficiency of the system?

A) 650 students and 600 students
B) 63.9% and 95.8%
C) 600 students and 650 students
D) 66.7% and 98.5%

Question 39

Utilization in services may be lower because of

A) variability in customer arrivals
B) variability in customer needs
C) both A and B
D) none of the above

Question 40

Effective capacity can be brought closer to design capacity by which of the following

A) improved worker scheduling
B) improved machine scheduling and maintenance
C) better raw material availability
D) all of the above

Question 41

Which of the following is false regarding capacity planning?

A) Too little capacity is better than too much capacity.
B) Excess capacity is better for customers and bad for business.
C) Too little capacity is bad for business and customers as it can lead to loss of customers and reputation.
D) Capacity planning can provide a strategic advantage to a business.

Question 42

Fixed costs are

A) assumed to be linearly increasing in the break-even model
B) incurred even if zero units are produced
C) equal to variable costs at the break-even point
D) none of the above

Question 43

All of the following are ways of improving capacity except

A) acquiring equipment and labor
B) outsourcing
C) increases in business productivity
D) reducing quality

Question 44

Bakewell Inc. wants to increase capacity by adding a new oven to their existing facility. The fixed costs for the Viking 2000 oven are $80,000, and its variable cost is $25 per unit. The revenue is $30 per unit. The break-even point for the Viking 2000 is

A) 3,200 units
B) 2,666.67 units
C) 1,454.55 units
D) 16,000 units

Question 45

Jerry's Landscaping wants to increase capacity by adding a new tree cutting machine. The firm is considering proposals from Supplier A and Supplier B. The fixed costs for machine A are $250,000 and for machine B, $275,000. The variable cost for A is $75.00 per hour and for B, $60.00 per hour of operation. The revenue generated by the trees cut on these machines is $800 per tree. If the estimated output is 500 trees, which machine should be purchased?

A) machine A
B) machine B
C) either machine A or machine B
D) neither machine A nor machine B

Question 46

Break-even analysis can be used by a firm for multiple product analysis, but

A) Each product has its own break-even point.
B) The BEP involves weighting each product's contribution ratio with its proportion of total revenue.
C) The contribution margin must be the same for each product.
D) The firm must allocate some fixed cost to each of the products.

Question 47

A product sells for $10 and has unit variable costs of $8. This product accounts for $25,000 in annual sales, out of the firm's total of $100,000. When performing multiproduct break-even analysis, the weighted contribution of this product is approximately

A) 0.05
B) 0.25
C) 0.0625
D) 0.75

Question 48

Salem College is embarking on a capital expenditure program involving a new campus building that depends on projected enrollment. There is a 60 percent chance that enrollment will increase by 1,000 students and a 40 percent chance that enrollment will increase by 500 students. If the current enrollment is 7,000 students, what should the design capacity of the new campus building be?

A) 800 students
B) 6,200 students
C) 7,800 students
D) 8,500 students

Question 49

Central Parking is considering whether to expand their current facilities. There is a 30 percent chance that 100 more spots will be needed because of a new increase in subway fares. However there is a 70 percent chance that only 50 more spots will be needed because the cost of driving will be roughly equal to mass transit. What should be their average lot expansion size?

A) 30 spots
B) 35 spots
C) 75 spots
D) 65 spots

Question 50

The three main strategies for changing capacity are

A) fast, medium, slow
B) expansionist, chase, lag
C) mixed, match, random
D) before, during, after

Question 51

A matching strategy for capacity can be employed by all of the following except

A) M&H Retailers
B) an architectural design firm
C) Hungry Jack's Seafood Shack
D) Out N' In Burgers

Question 52

Net present value (NPV)

A) is cash outflows minus cash inflows
B) is cash inflows minus cash outflows
C) ignores the time value of money
D) assumes a specific interest rate that stays stable

Question 53

Lady Ra-Ra's assistant wins the lottery and has an important decision to make about her winnings. It is better to

A) take a lump sum now because $1 today is worth more than $1 twenty years from now
B) take yearly payouts over 20 years so as to have a regular salary
C) leave it in the bank for 20 years to accumulate interest
D) none of the above

Question 54

A typical capacity planning process includes all of the following except

A) doing a capacity gap analysis
B) identifying locations of capacity change initiatives
C) forming a capacity planning team
D) identifying alternative approaches to match supply with demand

Question 55

Poor capacity planning can result in

A) unbudgeted increase in employee overtime
B) excess inventory
C) increase in the number of stockouts during peak demand periods
D) all of the above

Question 56

__________ is the maximum amount of output that a system can produce with existing resources in a manner over a given time period.

Question 57

Capacity __________ is the act of anticipating and arranging for capacity needs to provide satisfactory service levels to the consumer, at a profit.

Question 58

Capacity __________ is a tactical activity in the present moment, primarily focused on the efficient utilization of capacity and short-term actions to increase capacity scalability and flexibility to meet current demand.

Question 59

A capacity planning strategy that adds capacity after demand is seen and understood, is said to be a(n) __________ strategy.

Question 60

A(n) __________ strategy is one that adds capacity before demand exists or in anticipation of increased demand.

Question 61

Multiproduct break-even analysis calculates the __________ of each product with its proportion to each product's share of __________.

Question 62

What is the fundamental difference between effective capacity and design capacity? Provide a brief example.

Question 63

Distinguish between utilization and efficiency. Provide a brief example.

Question 64

Why is capacity planning important? How is it done? Give examples to support your answer.

Question 65

What are the sources of capacity? Illustrate your answer with examples.

Question 66

Identify the techniques for matching capacity to demand.

Question 67

Compare and contrast break-even analysis and cash flow analysis.

Question 68

Define fixed costs. Define variable costs. What are the assumptions of the BEA model?

Question 69

Some businesses (e.g., a hospital) cannot measure capacity in the typical way such as the amount of output in some specified period of time or throughput. Explain briefly why this is the case.

Question 70

The computer training facility at a local college provides training sessions to all employees. The capacity of the center was designed to be 2,400 employees per year. Since the training center was first put in use, the length of training time has become greater, so now, at most, 1,500 employees can be trained per year. In the previous year, 1,150 employees were trained. Calculate the efficiency and the utilization of this facility.

Question 71

A large lecture hall has a physical capacity of 325 students. However, Buildings and Grounds management personnel believe that only 275 students can be handled effectively for most classes. The last semester class, although forecasted to have 250 students, resulted in the attendance of only 235 students. What are the utilization and efficiency of the lecture hall?

Question 72

The copier repair facility has the capacity to repair 165 copiers per month. However, due to scheduled vacations of their repair personnel, management feels that they can repair no more than 140 copiers per month. Last month, three of the employees went on vacation for several days each, and only 125 copiers were repaired. What are the utilization and efficiency of the repair shop?

Question 73

The Three Brothers from Napoli Pizzeria makes personal pan pizzas. Currently, their ovens can produce 75 pizzas per hour. The restaurant has a fixed cost of $3,000 and a variable cost of $1.25 per pizza. The owners are considering purchasing bigger ovens that can make 100 pizzas per hour. It has a fixed cost of $5,000 but a variable cost of $0.75 per pizza.

A) At what quantity do the two ovens have equal costs?
B) If the owners expect to sell 9,000 pizzas, is the new oven a wise investment?

Question 74

Cake Boss wedding cakes are currently made in a process-focused shop, where fixed costs are $8,000 per month and variable cost is $150 per unit. The bakery sells the cakes for an average of $500 per unit. What is the break-even point for this operation? What is the profit (or loss) on a demand of 100 units per month?

Question 75

R&H Bloc sells two products. Product R sells for $50 and its variable cost is $8. Product H sells for $75 and its variable cost is $10. Product R accounts for 65 percent of the firm's sales, while Product H accounts for 35 percent. The firm's fixed costs are $3 million annually. Calculate R&H's break-even point.

Question 76

Two Buns burger joint is weighing three capacity expansion alternatives: small, medium, and large shops. Whatever capacity choice is made, the market conditions for the burgers can be described as "moderate" or "strong." The probability of a moderate market situation is estimated to be 40 percent; and a strong market situation has a probability of 60 percent. The payoffs are as follows.
$$\begin{array} { | l | c | c | } \hline & \text { Moderate Market Conditions } & \text { Strong Market Conditions } \\\hline \text { Small shop } & \$ 25,000 & \$ 50,000 \\\hline \text { Medium shop } & \$ 20,000 & \$ 70,000 \\\hline \text { Large shop } & - \$ 5,000 & \$ 90,000 \\\hline\end{array}$$ Which capacity choice should the company make?

Question 77

The efficiency of a production line is 85 percent and its utilization is 75 percent. If the effective capacity is 2,000, find the design capacity.

Question 78

A production line outputs 1,000 units an hour. If design capacity is 1,500 units per hour and efficiency is 80 percent find the utilization and effective capacity.

Question 79

A local bank manager is considering adding another teller to his staff in an effort to increase the number of hours the bank is open per day.

A) If the employee will cost the owner $3,000 per month and the bank generates $150/hour in revenue with variable costs of $25/hour, how many hours must the new teller work for the owner to break even?
B) The employee wants a raise to $3,500 per month and has agreed to work 140 hours. If variable costs remain at $25/hour and the bank's revenue is now uncertain because of stricter financial laws with a 50 percent chance of being $120/hour, a 30 percent chance of being $100/hour, and a 20 percent chance of being $75/hour, should the owner provide the raise?

Question 80

Brighter Smile Dental is about to invest in the latest ultrasound diagnostic equipment. The Chief Medical Officer estimates that it will generate uniform revenues of $400,000 for each of the next ten years. What is the net present value of this stream of earnings, at an interest rate of 4 percent? What is the net present value if the machine lasts only seven years and not ten years? If the equipment cost $2.5 million, should the facility purchase it?