SCMA 331 (CH7S)

A good capacity decision requires that it be tightly integrated with the organization's strategy and investments. But there are four other special "considerations" to making a good capacity decision. Identify them.

(1) Forecast demand accurately. (2) Match technology increments and sales volume. (3) Find the optimum operating size (volume). (4) Build for change.

What are the four limitations of the net present value technique?

(1) Investments with the same net present value may have significantly different projected lives and different salvage values. (2) Investments with the same net present value may have different cash flows. Different cash flows may make substantial differences in the company's ability to pay its bills. (3) The assumption is that we know future interest rates, which we do not. (4) Payments are always made at the end of the period (week, month, or year), which is not always the case.

Identify the six tactics for matching capacity to demand.

1. Making staffing changes (increasing or decreasing the number of employees or shifts), 2. Adjusting equipment (purchasing additional machinery or selling or leasing out existing equipment), 3. Improving processes to increase throughput, 4. Redesigning products to facilitate more throughput, 5. Adding process flexibility to better meet changing product preferences, and 6. Closing facilities.

Explain the importance of a bottleneck operation in a production sequence.

A bottleneck operation is the one that limits output in the production sequence. Consequently, to increase throughput of the facility, the bottleneck output must be increased.

A tortilla chip workstation produces 1,000 chips in 20 seconds. What is its bottleneck time? A) .02 seconds per chip B) 50 chips per second C) 20 seconds D) 6000 chips per minute E) 20,000 seconds

A) .02 seconds per chip

An assembly line has 10 stations with times of 1, 2, 3, 4, ..., 10, respectively. What is the bottleneck time? A) 18.18% of the throughput time B) 100% of the throughput time C) 550% of the throughput time D) 50% of the throughput time E) 1.82% of the throughput time

A) 18.18% of the throughput time

The Theory of Constraints (TOC) was popularized by: A) Goldratt and Cox. B) Ford. C) Taguchi. D) Deming. E) Motorola and GE.

A) Goldratt and Cox.

) In "drum, buffer, rope," what provides the schedule, i.e. the pace of production? A) drum B) buffer C) rope D) all three of the above in combination E) none of the above

A) drum

Utilization will always be lower than efficiency because: A) effective capacity is less than design capacity. B) effective capacity is greater than design capacity. C) effective capacity equals design capacity. D) expected output is less than actual output. E) expected output is less than rated capacity.

A) effective capacity is less than design capacity.

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 reduce facility size. C) is suffering from diseconomies of scale. D) has utilization higher than efficiency. E) has expected output higher than rated capacity.

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) lower resort hotel room prices on Wednesdays B) appointments C) reservations D) first-come, first-served rule E) none of the above

A) lower resort hotel room prices on Wednesdays

A work system has five stations that have process times of 5, 9, 4, 9, and 8. What is the bottleneck time? A) 4 B) 9 C) 18 D) 35 E) 7

B) 9

The staff training center at a large regional hospital provides training sessions in CPR to all employees. Assume that the capacity of this training system was designed to be 1200 employees per year. Since the training center was first put into use, the program has become more complex, so that 1050 now represents the most employees that can be trained per year. In the past year, 950 employees were trained. The efficiency of this system is approximately ________ and its utilization is approximately ________. A) 79.2 percent; 90.5 percent B) 90.5 percent; 79.2 percent C) 87.5 percent; 950 employees D) 950 employees; 1050 employees E) 110.5 percent; 114.3 percent

B) 90.5 percent; 79.2 percent

Consider a production line with five stations. Station 1 can produce a unit in 9 minutes. Station 2 can produce a unit in 10 minutes. Station 3 has two identical machines, each of which can process a unit in 12 minutes (each unit only needs to be processed on one of the two machines. Station 4 can produce a unit in 5 minutes. Station 5 can produce a unit in 8 minutes. Which station is the bottleneck station? A) Station 1 B) Station 2 C) Station 3 D) Station 4 E) Station 5

B) Station 2

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.

A product is currently made in a process-focused shop, where fixed costs are $9,000 per year and variable cost is $50 per unit. The firm sells the product for $200 per unit. What is the break-even point for this operation? What is the profit (or loss) on a demand of 200 units per year?

BEP = 60 units; TR = $40,000, TC = $19,000, therefore Profit = $21,000.

A firm is considering adding a second secretary to answer phone calls and make appointments. The cost of the secretary will be $10/hour and she will work 200 hours each month. If each new client adds $400 of profit to the firm, how many clients must the secretary arrange for the firm to break even?

BEP= 10(200)/(400) = 5 clients per month

Distinguish between utilization and efficiency.

Both are ratios, not item counts. Both use actual output in the ratio numerator. Utilization is the ratio of actual output to design capacity, so it measures output as a fraction of ideal facility usage. Efficiency is the ratio of actual output to effective capacity, so it measures output as a fraction of the practical or current limits of the facility. Utilization will be lower than efficiency.

________ analysis finds the point at which costs equal revenues.

Break-even

How is break-even analysis useful in the study of the capacity decision? What limitations does this analytical tool have in this application?

Breakeven is defined as the volume for which costs equal revenue. It is useful to know the break-even point for each capacity alternative under consideration. In reality, costs may not be as linear as they are assumed to be in this model.

Christopher's Cranks uses a machine that can produce 100 cranks per hour. The firm operates 12 hours per day, five days per week. Due to regularly scheduled preventive maintenance, the firm expects the machine to be running during approximately 95% of the available time. Based on experience with other products, the firm expects to achieve an efficiency level for the cranks of 85%. What is the expected weekly output of cranks for this company? A) 5100 B) 5700 C) 4845 D) 969 E) 6783

C) 4845

Lag and straddle strategies for increasing capacity have what main advantage over a leading strategy? A) They are cheaper. B) They are more accurate. C) They delay capital expenditure. D) They increase demand. E) All of the above are advantages.

C) They delay capital expenditure.

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

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 that 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.

Fabricators, Inc. wants to increase capacity by adding a new machine. The fixed costs for machine A are $90,000, and its variable cost is $15 per unit. The revenue is $21 per unit. What is the break-even point for machine A? A) $90,000 dollars B) 90,000 units C) $15,000 dollars D) 15,000 units E) 4,286 units

D) 15,000 units

A work system has five stations that have process times of 5, 9, 4, 9, and 8. What is the throughput time of the system? A) 4 B) 9 C) 18 D) 35 E) 7

D) 35

The Academic Computing Center has five trainers available in its computer labs to provide training sessions to students. Assume that the design capacity of the system is 1900 students per semester and that effective capacity equals 90% of design capacity. If the number of students who actually got their orientation session is 1500, what is the efficiency of the system? A) 1350 students B) 1710 students C) 78.9% D) 87.7% E) 90%

D) 87.7%

The Theory of Constraints (TOC) strives to reduce the effect of constraints by: A) offloading work from constrained workstations. B) increasing constrained workstation capability. C) changing workstation order to reduce throughput time. D) A and B E) A, B, and C

D) A and B

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) In manufacturing, excess capacity can be used to do more setups, shorten production runs, and drive down inventory costs.

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

Effective capacity × Efficiency equals: A) efficient capacity. B) utilization. C) actual 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) if the future value of a cash flow 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.

An executive conference center has the physical ability to handle 1,100 participants. However, conference management personnel believe that only 1,000 participants can be handled effectively for most events. The last event, although forecasted to have 1,000 participants, resulted in the attendance of only 950 participants. What are the utilization and efficiency of the conference facility?

Design Capacity = 1,100 participants Effective Capacity = 1,000 participants Actual Output = 950 participants Utilization = = = 86.4% Efficiency = = = 95.0%

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

Design capacity is the theoretical maximum output of a system in a given period under ideal conditions. Effective capacity, on the other hand, is the capacity that a firm expects to achieve given the current operating constraints. Effective capacity is often lower than design capacity because the facility may have been designed for an earlier version of the product or a different product mix than is currently being produced. Most firms operate at less than design capacity because they don't want to be stretching their resources to the limit. As an example, a restaurant might have 100 seats, but it only opens up 60 every night because it cannot find enough qualified servers.

What is a common method used to increase capacity with a lag strategy? A) overtime B) subcontracting C) new facilities D) new machinery E) A and B

E) A and B

Which of the following techniques is NOT a technique for dealing with a bottleneck? A) Schedule throughput to match the capacity of the bottleneck. B) Increase the capacity of the constraint. C) Have cross-trained employees available to keep the constraint at full operation. D) Develop alternate routings. E) All are techniques for dealing with bottlenecks.

E) All are techniques for dealing with bottlenecks.

Which of the following is not one of the four principles of bottleneck management? A) Release work orders to the system at the bottleneck's capacity pace. B) Lost time at the bottleneck is lost system capacity. C) Increasing capacity at non-bottleneck stations is a mirage. D) Increased bottleneck capacity is increased system capacity. E) Bottlenecks should be moved to the end of the system process.

E) Bottlenecks should be moved to the end of the system process.

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.

The theory of constraints has its origins in: A) linear programming theory. B) the theory of economies of scale. C) material requirements planning. D) the theory of finite capacity planning. E) Goldratt and Cox's book, The Goal: A Process of Ongoing Improvement.

E) Goldratt and Cox's book, The Goal: A Process of Ongoing Improvement.

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.

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.

________ is actual output as a percent of effective capacity.

Efficiency

The staff training center at a large regional hospital provides training sessions in CPR to all employees. Assume that the capacity of this training system was designed to be 1800 employees per year. Since the training center was first put in use, the program has become more complex, so that 1400 now represents the most employees that can be trained per year. In the past year, 1350 employees were trained. Calculate the efficiency and the utilization of this system.

Efficiency = 1350 / 1400 = .964 or 96.4 percent; utilization = 1350 / 1800 = .75 or 75 percent

(T/F)Break-even analysis identifies the volume at which fixed costs and revenue are equal.

FALSE

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

FALSE

(T/F)Capacity decisions are based on technological concerns, not demand forecasts.

FALSE

(T/F)Effective capacity is typically larger than design capacity.

FALSE

(T/F)Possible decision alternatives found in capacity EMV problems are future demands or market favorability.

FALSE

(T/F)Substantial research has proved that the only successful method of dealing with bottlenecks is to increase the bottleneck's capacity.

FALSE

(T/F)The bottleneck time is always at least as long as the throughput time.

FALSE

(T/F)The net present value of $10,000 to be received in exactly three years is considerably greater than $10,000.

FALSE

(T/F)To find the throughput time with simultaneous processes, compute the time over all paths and choose the shortest path through the system.

FALSE

(T/F)Utilization is the number of units a facility can hold, receive, store, or produce in a period of time.

FALSE

________ cost is the cost that continues even if no units are produced.

Fixed

Define fixed costs.

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

________ is a means of determining the discounted value of a series of future cash receipts.

Net present value or NPV

The efficiency of a factory is 75% and its utilization 50%. If effective capacity is 1000 find design capacity.

Output = Efficiency ∗Effective Capacity = Utilization ∗Design Capacity. Solving gives .75(1000) = .50 (Design Capacity), Design Capacity = 1500

In "drum, buffer, rope," the ________ acts like signals between workstations.

ROPE

(T/F) Fixed costs are those costs that continue even if no units are produced.

TRUE

(T/F)A useful tactic for increasing capacity is to redesign a product in order to facilitate more throughput.

TRUE

(T/F)Changes in capacity may lead, lag, or straddle the demand.

TRUE

(T/F)Design capacity is the theoretical maximum output of a system in a given period under ideal conditions.

TRUE

(T/F)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

(T/F)Price changes are useful for matching the level of demand to the capacity of a facility.

TRUE

(T/F)The theory of constraints is a body of knowledge that deals with anything that limits an organization's ability to achieve its goals.

TRUE

Why is the capacity decision important?

The capacity decision is important for several reasons. First, capacity costs represent a large portion of fixed costs. Second, a facility of the wrong size means that costs are not as low as they could be. If a facility is too large, and portions of it remain idle, the firm's costs are too high because of the higher fixed costs. If a plant is too small, costs are again higher than they might be due to inefficiencies of working in cramped and crowded spaces. Further, a facility too small may lead to lost sales, perhaps even lost markets.

Identify, in proper sequence, the steps in the process of recognizing and managing constraints.

The five-step process of the theory of constraints includes: Step 1: Identify the constraints. Step 2: Develop a plan for overcoming the identified constraints. Step 3: Focus resources on accomplishing Step 2. Step 4: Reduce the effects of the constraints by offloading work or by expanding capability. Make sure that the constraints are recognized by all those who can have an impact on them. Step 5: When one set of constraints is overcome, go back to Step 1 and identify new constraints.

Describe the theory of constraints in a sentence.

The theory of constraints is the body of knowledge that deals with anything that limits an organization's ability to achieve its goals.

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

Throughput or Capacity

________ is actual output as a percent of design capacity.

Utilization

Definevariable costs. What special assumption is made about variable costs in the textbook?

Variable costs are those that vary with the number of units produced. Linearity (or proportionality) is assumed.

Multiproduct break-even analysis calculates the ________ of each product, ________ it in proportion to each product's share of total sales.

contribution; weighting

In the service sector, scheduling customers is a type of ________ management, while scheduling the workforce is a type of ________.

demand; capacity

The capacity planning strategy that delays adding capacity until capacity is below demand, then adds a capacity increment so that capacity is above demand, is said to ________ demand.

straddle