ISDS 3115 Chapter S7

A decision tree for analyzing capacity would have future demands or market favorability as the decision alternatives.

False

A decision tree indicates at what quantity profit changes from negative to positive.

False

Break-even analysis identifies the volume at which fixed costs and revenue are equal.

False

Break-even analysis is a powerful analytical tool, but is useful only when the organization produces a single product.

False

Building an additional warehouse is an incremental expansion, not a one-step expansion.

False

Capacity decisions are based on technological concerns, not demand forecasts.

False

Utilization is the number of units a facility can hold, receive, store, or produce in a period of time.

False

A useful tactic for increasing capacity is to redesign a product in order to get more throughput.

True

Changes in capacity may lead, lag, or straddle the demand.

True

Design capacity is the theoretical maximum output of a system in a given period under ideal conditions.

True

Expected output is sometimes referred to as rated capacity.

True

Fixed costs are those costs that continue even if no units are produced.

True

One limitation of the net present value approach to investments is that investments with identical net present values may have very different cash flows.

True

Price changes are useful for matching the level of demand to the capacity of a facility.

True

If demand exceeds capacity at a new facility, an organization can use which of the following to move demand to an existing facility? a. aggressive marketing b. lower prices at all facilities c. build a facility of the correct size d. add a complementary product e. reduce lead times

a. aggressive marketing

An organization whose capacity is on that portion of the average unit cost curve that falls as output rises a. has a facility that is below optimum operating level and should build a larger facility b. has a facility that is above optimum operating level and should build a smaller facility c. is suffering from diseconomies of scale d. has utilization higher than efficiency e. has efficiency higher than utilization

a. has a facility that is below optimum operating level and should build a larger facility

Which of the following represents an aggressive approach to demand management in the service sector when demand and capacity are not particularly well matched? a. inexpensive rates for weekend phone calls b. appointments c. reservations d. first-come, first-served e. none of the above

a. inexpensive rates for weekend phone calls

Which of the following statements regarding fixed costs is true? a. Fixed costs rise by a constant amount for every added unit of volume. b. While fixed costs are ordinarily constant with respect to volume, they can "step" upward if volume increases result in additional fixed costs. c. Fixed costs are those costs associated with direct labor and materials. d. Fixed costs equal variable costs at the break-even point. e. Fixed cost is the difference between selling price and variable cost.

b. While fixed costs are ordinarily constant with respect to volume, they can "step" upward if volume increases result in additional fixed costs.

Effective capacity is the a. maximum output of a system in a given period b. capacity a firm expects to achieve given the current operating constraints c. average output that can be achieved under ideal conditions d. minimum usable capacity of a particular facility e. sum of all of the organization's inputs

b. capacity a firm expects to achieve given the current operating constraints

The basic break-even model can be modified to handle more than one product. This extension of the basic model requires a. price and sales volume for each product b. price and variable cost for each product, and the percent of sales that each product represents c. that the firm have very low fixed costs d. that the ratio of variable cost to price be the same for all products e. sales volume for each product

b. price and variable cost for each product, and the percent of sales that each product represents

Basic break-even analysis typically assumes that a. revenues increase in direct proportion to the volume of production, while costs increase at a decreasing rate as production volume increases b. variable costs and revenues increase in direct proportion to the volume of production c. both costs and revenues are made up of fixed and variable portions d. costs increase in direct proportion to the volume of production, while revenues increase at a decreasing rate as production volume increases because of the need to give quantity discounts e. All of the above are assumptions in the basic break-even model.

b. variable costs and revenues increase in direct proportion to the volume of production

Which of the following represents a common way to manage capacity in the service sector? a. appointments b. reservations c. changes in staffing levels d. first-come, first served service rule e. "early bird" specials in restaurants

c. changes in staffing levels

When decision trees are used to analyze capacity decisions, a. "do nothing" is not a possible decision alternative b. probabilities must be assigned to each of the decision alternatives c. states of nature are often demand-based, as in "market favorability" d. states of nature must be known with certainty e. fixed costs are not relevant

c. states of nature are often demand-based, as in "market favorability"

Adding a complementary product to what is currently being produced is a demand management strategy used when a. demand exceeds capacity b. capacity exceeds demand for a product which has stable demand c. the existing product has seasonal or cyclical demand d. price increases have failed to bring about demand management e. efficiency exceeds 100 percent

c. the existing product has seasonal or cyclical demand

Which of the following is false regarding capacity expansion? a. "Average" capacity sometimes leads demand, sometimes lags it. b. If "lagging" capacity is chosen, excess demand can be met with overtime or subcontracting. c. Total cost comparisons are a rather direct method of comparing capacity alternatives. d. Capacity may only be added in large chunks. e. All of the above are true.

d. Capacity may only be added in large chunks.

Which of the following costs would be incurred even if no units were produced? a. raw material costs b. direct labor costs c. transportation costs d. building rental costs e. purchasing costs

d. building rental costs

What is sometimes referred to as rated capacity? a. efficiency b. utilization c. effective capacity d. expected output e. design capacity

d. expected output

Net present value will be greater a. as a fixed set of cash receipts occurs later rather than earlier b. as the total of the cash receipts, made in same time periods, is smaller c. for one end-of-year receipt of $1200 than for twelve monthly receipts of $100 each d. for a 4% discount rate than for a 6% discount rate e. All of the above are true.

d. for a 4% discount rate than for a 6% discount rate

Break-even analysis can be used by a firm that produces more than one product, but a. the results are estimates, not exact values b. the firm must allocate some fixed cost to each of the products c. each product has its own break-even point d. the break-even point depends upon the proportion of sales generated by each of the products e. None of these statements is true.

d. the break-even point depends upon the proportion of sales generated by each of the products

Of the four approaches to capacity expansion, the approach that "straddles" demand a. uses incremental expansion b. uses one-step expansion c. at some times leads demand, and at other times lags d. works best when demand is not growing but is stable e. Choices a and c are both correct.

e. Choices a and c are both correct.

Net present value a. is gross domestic product less depreciation b. is sales volume less sales and excise taxes c. is profit after taxes d. ignores the time value of money e. is the discounted value of a series of future cash receipts

e. is the discounted value of a series of future cash receipts

Which of the following is not one of the four approaches to capacity expansion? a. average capacity with incremental expansion b. lead demand with incremental expansion c. lag demand with incremental expansion d. lead demand with one-step expansion e. lag demand with one-step expansion

e. lag demand with one-step expansion

Break-even is the number of units at which a. total revenue equals price times quantity b. total revenue equals total variable cost c. total revenue equals total fixed cost d. total profit equals total cost e. total revenue equals total cost

e. total revenue equals total cost