BADM 375 midterm module 1-4

Assume a fixed cost for a process of $120,000. The variable cost to produce each unit of product is $35, and the selling price for the finished product is $50. Which of the following is the number of units that has to be produced and sold to break even?

8000 units $50 - $35 = $15; $120,000/$15 = 8,000 units.

AlwaysRain Irrigation's marketing department will undertake an intense ad campaign for the bronze sprinklers, which are more expensive but also more durable than the plastic ones. Currently two production lines are in place for making bronze and plastic sprinklers. Three types of sprinklers are available in both bronze and plastic: 90-degree nozzle sprinklers, 180-degree nozzle sprinklers, and 360-degree nozzle sprinklers. Forecast demand for the next four years is YEARLY DEMAND 1 (in 000s) 2 (in 000s) 3 (in 000s) 4 (in 000s) Plastic 90 32 44 55 56 Plastic 180 15 16 17 18 Plastic 360 50 55 64 67 Bronze 90 11 15 18 23 Bronze 180 6 5 6 9 Bronze 360 15 16 17 20 Both production lines can produce all the different types of nozzles. The bronze machines needed for the bronze sprinklers require two operators per machine and can produce up to 12,000 sprinklers per machine. The plastic injection molding machine needed for the plastic sprinklers requires four operators per machine and can produce up to 200,000 sprinklers per machine. Three bronze machines and only one injection molding machine are available. Suppose that operators have enough training to operate both the bronze machines and the injection molding machine for the plastic sprinklers. Currently AlwaysRain has 10 such employees. In anticipation of the above ad campaign, management approved the purchase of two additional bronze machines. What are the labor requirement implications? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

AlwaysRain will face a problem of not having enough trained personnel for running the equipment after the third year. At that time, they will need to either hire new trained employees or initiate a training program for existing employees from other workstations who can be utilized at the bronze or plastic molding machines. Year 1 Year 2 Year 3 Year 4 Plastic Demand for plastic sprinklers 97.00 115.00 136.00 141.00 Percentage of capacity used 48.50% 57.50% 68.00% 70.50% Machine requirements 0.49 0.58 0.68 0.71 Labor requirements 1.96 2.32 2.72 2.84 Bronze Demand for bronze sprinklers 32.00 36.00 41.00 52.00 Percentage of capacity used 66.67% 75.00% 85.42% 108.33% Machine requirements 2.67 3.00 3.42 4.33 Labor requirements 5.34 6.00 6.84 8.66

Dell Computer's primary consumer business takes orders from customers for specific configurations of desktop and laptop computers. Customers must select from a certain model line of computer and choose from available parts, but within those constraints may customize the computer as they desire. Once the order is received, Dell assembles the computer as ordered and delivers it to the customer. What type of manufacturing process is described here?

Assemble-to-order correct Explanation: Because the computers are made from a fixed set of parts that a customer can choose from, this process would be considered assemble-to-order.

Which of the following best describes the term "cycle time"?

Average time between completions of successive units The cycle time of a repetitive process is the average time between completions of successive units.

A company has a factory that is designed so that it is most efficient (average unit cost is minimized) when producing 16,600 units of output each month. However, it has an absolute maximum output capability of 20,000 units per month, and can produce as little as 7,000 units per month without corporate headquarters shifting production to another plant. If the factory produces 11,810 units in October, what is the capacity utilization rate in October for this factory?

Capacity utilization is computed as (Actual Output)/(Best Operating Level). The best operating level is that level of output for which unit cost is minimized and therefore the system is most efficient. 11810/16600 = 71.1%

Which of the following models uses a schematic model of the sequence of steps in a problem and the conditions and consequences of each step?

Decision trees A decision tree is a schematic model of the sequence of steps in a problem and the conditions and consequences of each step.

AlwaysRain Irrigation, Inc., would like to determine capacity requirements for the next four years. Currently two production lines are in place for making bronze and plastic sprinklers. Three types of sprinklers are available in both bronze and plastic: 90-degree nozzle sprinklers, 180-degree nozzle sprinklers, and 360-degree nozzle sprinklers. Suppose that AlwaysRain Irrigation's marketing department will undertake an intense ad campaign for the bronze sprinklers, which are more expensive but also more durable than the plastic ones. Forecast demand for the next four years is YEARLY DEMAND 1 (in 000s) 2 (in 000s) 3 (in 000s) 4 (in 000s) Plastic 90 33 42 54 51 Plastic 180 14 15 18 17 Plastic 360 51 54 61 68 Bronze 90 11 13 17 23 Bronze 180 7 5 6 12 Bronze 360 13 15 14 17 Both production lines can produce all the different types of nozzles. The bronze machines needed for the bronze sprinklers require four operators per machine and can produce up to 15,000 sprinklers per machine. The plastic injection molding machine needed for the plastic sprinklers requires five operators per machine and can produce up to 240,000 sprinklers per machine. Three bronze machines and only one injection molding machine are available. What are the capacity implications of the marketing campaign (assume no learning)? (Enter the demand values in thousands. Round your answers to 2 decimal places.)

Demand for plastic sprinklers Year 1 Year 2 Year 3 Year 4 Plastic Demand for plastic sprinklers 98(33+14+51) , 111, 133, 136 (add all demand for plastic in the particular year) Percentage of capacity used 40.83%(98/240) 46.25% 55.42 % 56.67% (actual output or demand/best operating level which is 240,000 for plastic) Machine requirements 0.41(98/240) 0.46. 0.55. 0.57 (demand/machine output) Labor requirements 2.05 ((98/240 *5) 2.3. 2.75. 2.85 ((demand/machine output) *number of labor needed for operating the machine) Bronze Demand for bronze sprinklers 31. 33. 37. 52. (add all demand for bronze in the particular year) Percentage of capacity used 68.89%(31/45). 73.33% 82.22%. 115.56% (demand/(total machine output * no. of machines)) Machine requirements 2.07(31/15) 2.20. 2.47. 3.47 (demand/machine outpur for one machine) Labor requirements 8.28.((31/15)*4) 8.80. 9.88 13.88 ((demand/machine outpur for one machine)*number of labor needed for operating the machine)

A process flowchart uses which of the following symbols to represent a decision point in a flow diagram?

Diamond Decision points are depicted as a diamond with the different flows running from the points on the diamond.

The capacity cushion is the ratio of capacity used to the best capacity level.

False A capacity cushion is an amount of capacity in excess of expected demand.

A continuous process indicates production of discrete parts moving from workstation to workstation at a controlled rate.

False A continuous process is similar to an assembly line in that production follows a predetermined sequence of steps, but the flow is continuous such as with liquids, rather than discrete.

Blocking in production processes is when activities in a stage must continue because there is no place to deposit completed items.

False Blocking occurs when the activities in the stage must stop because there is no place to deposit the item just completed.

A diamond is conventionally used in a process flowchart to represent a storage area or queue.

False Decision points are depicted as a diamond with the different flows running from the points on the diamond.

Low rates of capacity utilization in service organizations are never appropriate.

False Hospital emergency rooms and fire departments should aim for low utilization because of the high level of uncertainty and the life-or-death nature of their activities.

Process selection refers to the strategic decision of choosing the volume of output to produce in a manufacturing facility depending upon the way that facility produces.

False Process selection refers to the strategic decision of selecting which kind of production processes to use to produce a product or provide a service.

The closer the customer is to the customer order decoupling point, the longer it takes the customer to receive the product.

False Selection of decoupling points is a strategic decision that determines customer lead times and can greatly affect inventory investment. The closer this point is to the customer, the quicker the customer can be served.

The time needed to respond to a customer's order is called the customer response time.

False The time needed to respond to a customer order is called the lead time.

The larger the capacity cushion, the better.

False This is false for the firm whose competitive advantage is low cost or price. For a firm competing on speed of delivery or innovative ability, for example, a larger capacity cushion will allow more flexibility and enable an appropriate response to unplanned orders.

The capacity utilization rate is found by dividing best operating level by capacity used.

False The capacity utilization rate is found by dividing capacity used by best operating level.

When deciding to add capacity to a factory, which of the following need not be considered?

Immediate product demand Many issues must be considered when adding or decreasing capacity. Three important ones are maintaining system balance, frequency of capacity additions or reductions, and the use of external capacity. In many cases, the size of a plant may be influenced by factors other than the internal equipment, labor, and other capital expenditures. A major factor may be the cost to transport raw materials.

Capacity planning that involves hiring, layoffs, some new tooling, minor equipment purchases, and subcontracting is considered as which one of the following planning horizons?

Intermediate range Intermediate range: monthly or quarterly plans for the next 6 to 18 months. Here, capacity may be varied by such alternatives as hiring, layoffs, new tools, minor equipment purchases, and subcontracting.

In a flowchart, what is used to represent a storage activity in a process?

Inverted triangle Explanation: Flowcharts use a number of simple symbols to represent typical business process activities. An inverted triangle (think a yield sign) is used to represent storage activities.

Capacity planning involving acquisition or disposal of fixed assets such as buildings, equipment or facilities is considered as which one of the following planning horizons?

Long range Long range: greater than one year. Where productive resources (such as buildings, equipment, or facilities) take a long time to acquire or dispose of, long-range capacity planning requires top management participation and approval.

AudioCables, Inc., is currently manufacturing an adapter that has a variable cost of $0.50 per unit and a selling price of $1.20 per unit. Fixed costs are $14,000. Current sales volume is 30,000 units. The firm can substantially improve the product quality by adding a new piece of equipment at an additional fixed cost of $6,000. Variable costs would increase to $0.60, but sales volume should jump to 50,000 units due to a higher-quality product. a. What is the current profit and proposed profit of the sales of AudioCables? (Negative amounts should be indicated by a minus sign.) Current profit $ Proposed profit $ b. Should AudioCables buy the new equipment?

Profit for current method = Volume x (Selling Price − Variable Cost) − Fixed Costs = 30,000 × (1.20 − 0.50) − 14,000 = $7,000. Profit for proposed method = Volume x (Selling Price − Variable Cost) − Fixed Costs = 50,000 × (1.20 − 0.60) − (14,000 + 6,000) = $10,000. Therefore, based on profit maximization, the answer to the question "Should AudioCables buy the new equipment?" is Yes.

What is the first of the three simple steps in the high-level view of manufacturing?

Sourcing the parts we need correct Explanation: The three steps are sourcing the parts we need, followed by actually making the items, and then delivering the finished items to the customer.

hich of the following production process terms best describes the situation when activities in a stage of production must stop because there is no work?

Starving Starving occurs when the activities in a stage must stop because there is no work.

A manufacturing process has a fixed cost of $150,000 per month. Each unit of product being produced contains $28 worth of material and takes $40 of labor. How many units are needed to break even if each completed unit has a value of $90? (Roundup your answer to the next whole number.)

The breakeven point is where total cost equals total revenue. Total costs include the fixed cost (FC) plus the variable cost (VC) times the number of units sold (Q). (In this case the unit variable cost is the sum of the cost of material and the cost of labor.) Total revenue equals the selling price (SP) times the number of units sold (Q). Solve for the value of Q that satisfies the following: FC + (VC × Q) = SP × Q, which is equivalent to: Q = FC/(SP - VC).

What is an important difference between capacity planning in services and capacity planning in manufacturing operations? All of these

Time Location Demand volatility Utilization affects service Although capacity planning in services is subject to many of the same issues as manufacturing capacity planning, and facility sizing can be done in much the same way, there are several important differences. Service capacity is more time and location dependent, it is subject to more volatile demand fluctuations, and utilization directly affects service quality.

Little's law says there is a long-term relationship among the inventory, throughput, and flow time of a production system in steady state.

True Little's law says there is a long-term relationship among the inventory, throughput, and flow time of a production system in steady state.

Break-even analysis can be used to help decide whether to perform a task with a special-purpose machine or with a general-purpose machine.

True A standard approach to choosing among alternative processes or equipment is break-even analysis.

Engineer-to-order firms will work with the customer to design the product and then make it from purchased materials, parts, and components.

True An engineer-to-order firm will work with the customer to design the product and then make it from purchased materials, parts, and components.

project layout is characterized by a relatively low number of production units in comparison with process and product layout formats.

True See Exhibit7.2, Product-Process Matrix: Framework Describing Layout Strategies.

The focus in the make-to-stock environment is on providing finished goods where and when the customers want them.

True The focus in the make-to-stock environment is on providing finished goods where and when the customers want them

One trade-off illustrated by the product-process matrix is between flexibility and cost

True To produce nonstandard products at relatively low volumes, work centers (flexible) should be used. A highly standardized product (low-cost commodity) produced at high volumes should be produced using an assembly line or a continuous process.

Capacity can be defined as the amount of available resource inputs relative to requirements for output over a particular period of time.

True Capacity is a relative term; in an operations management context, it may be defined as the amount of resource inputs available relative to output requirements over a particular period of time.

Sharing capacity is a common source of external capacity.

True In some cases, it may be cheaper to not add capacity at all, but rather to use some existing external source of capacity. Two common strategies used by organizations are outsourcing and sharing capacity.

The basic notion of economies of scale is that as a plant gets larger and volume increases, the average cost per unit of output drops.

True The basic notion of economies of scale is that as a plant gets larger and volume increases, the average cost per unit of output drops.

When evaluating capacity, managers need to consider both resource inputs and product outputs.

True When looking at capacity, operations managers need to look at both resource inputs and product outputs.

Capacity flexibility means having the ability to rapidly increase or decrease production levels or to shift production capacity quickly from one product or service to another.

True Capacity flexibility means having the ability to rapidly increase or decrease production levels or to shift production capacity quickly from one product or service to another.

Which of the following basic types of process structures is one in which similar equipment or functions are grouped together?

Work center A work-center layout is where similar equipment or functions are grouped together.

The Goodparts Company produces a component that is subsequently used in the aerospace industry. The component consists of three parts (A, B, and C) that are purchased from outside and cost 40, 35, and 15 cents per piece, respectively. Parts A and B are assembled first on assembly line 1, which produces 140 components per hour. Part C undergoes a drilling operation before being finally assembled with the output from assembly line 1. There are in total six drilling machines, but at present only three of them are operational. Each drilling machine drills part C at a rate of 50 parts per hour. In the final assembly, the output from assembly line 1 is assembled with the drilled part C. The final assembly line produces at a rate of 160 components per hour. At present, components are produced eight hours a day and five days a week. Management believes that if need arises, it can add a second shift of eight hours for the assembly lines. The cost of assembly labor is 30 cents per part for each assembly line; the cost of drilling labor is 15 cents per part. For drilling, the cost of electricity is one cent per part. The total overhead cost has been calculated as $1,200 per week. The depreciation cost for equipment has been calculated as $30 per week. a. Determine the process capacity (number of components produced per week) of the entire process. Process capacity b-1 Suppose a second shift of eight hours is run for assembly line 1 and the same is done for the final assembly line. In addition, four of the six drilling machines are made operational. The drilling machines, however, operate for just eight hours a day. What is the new process capacity (number of components produced per week)? New process capacity units per week b-2. Which of the three operations limits the capacity? c-1. Management decides to run a second shift of eight hours for assembly line 1 plus a second shift of only four hours for the final assembly line. Five of the six drilling machines operate for eight hours a day. What is the new capacity? New capacity units per week c-2. Which of the three operations limits the capacity? d-1. Determine the cost per unit output for part b. (Round your answer to 2 decimal places.) Cost per unit $ d-2. Determine the cost per unit output for part c. (Round your answer to 2 decimal places.) Cost per unit $ e. The product is sold at $4.00 per unit. Assume that the cost of a drilling machine (fixed cost) is $30,000 and the company produces 8,000 units per week. Assume that four drilling machines are used for production. If the company had an option to buy the same part at $3.00 per unit, what would be the break-even number of units? (Round your answer to the nearest whole number.)

a. Capacity of assembly line 1 = 140 units/hour × 8 hours/day × 5 days/week = 5,600 units/week. Capacity of drill machines = 3 drill machines × 50 parts/hour × 8 hours/day × 5 days/week = 6,000 units/week. Capacity of final assembly line = 160 units/hour × 8 hours/day × 5 days/week = 6,400 units/week. The capacity of the entire process is 5,600 units per week, with assembly line 1 limiting the overall capacity. b. Capacity of assembly line 1 = 140 units/hour × 16 hours/day × 5 days/week = 11,200 units/week. Capacity of drill machines = 4 drilling machines × 50 parts/hour × 8 hours/day × 5 days/week = 8,000 units/week. Capacity of final assembly line = 160 units/hour × 16 hours/day × 5 days/week = 12,800 units/week. The capacity of the entire process is 8,000 units per week, with drilling machines limiting the overall capacity. c. Capacity of assembly line 1 = 140 units/hour × 16 hours/day × 5 days/week = 11,200 units/week. Capacity of drill machines = 5 drilling machines × 50 parts/hour × 8 hours/day × 5 days/week = 10,000 units/week. Capacity of final assembly line = 160 units/hour × 12 hours/day × 5 days/week = 9,600 units/week. The capacity of the entire process is 9,600 units per week, with final assembly machines limiting the overall capacity. d-1. Cost per unit when output = 8,000 units. Item Calculation Cost Cost of part A $ .40 × 8,000 $ 3,200 Cost of part B $ .35 × 8,000 2,800 Cost of part C $ .15 × 8,000 1,200 Electricity $ .01 × 8,000 80 Assembly 1 labor $ .30 × 8,000 2,400 Final assembly labor $ .30 × 8,000 2,400 Drilling labor $ .15 × 8,000 1,200 Overhead $ 1,200 per week 1,200 Depreciation $ 30 per week 30 Total $ 14,510 Cost per unit = Total cost per week/Number of units produced per week = $14,510/8,000 = $1.81 d-2. Cost per unit when output = 9,600 units. Item Calculation Cost Cost of part A $ .40 ×9,600. =$3,840 Cost of part B $ .35×9,600 =3,360 Cost of part C $ .15×9,600 =1,440 Electricity $ .01 ×9,600 = 96 Assembly 1 labor $ .30 ×9,600 =2,880 Final assembly labor $0.30×9,600 = 2,880 Drilling labor $ .15 × 9,600 = 1,440 Overhead $ 1,200 per week = 1,200 Depreciation $ 30 per week = 30 Total $ 17,166 Cost per unit = Total cost per week/Number of units produced per week = $17,166/9,600 = $1.79 e. Let X = the number of units that each option will produce. When the company buys the units, the cost is $3.00 per unit (3X). When it manufactures the units, they incur a fixed cost of $120,000 (4 drilling machines at $30,000 a piece) and a per unit cost of $1.81. Therefore, 120,000 + 1.81X is the cost of this option. Set them equal to each other and solve for X to determine the breakeven point. 3X = 120,000 + 1.81X X = 100,840 units. Therefore, it is better to buy the units when you produce less than 100,840, and better to produce them when demand is greater than 100,840 units.

A builder has located a piece of property that she would like to buy and eventually build on. The land is currently zoned for four homes per acre, but she is planning to request new zoning. What she builds depends on approval of zoning requests and your analysis of this problem to advise her. With her input and your help, the decision process has been reduced to the following costs, alternatives, and probabilities: Cost of land: $3 million. Probability of rezoning: 0.50. If the land is rezoned, there will be additional costs for new roads, lighting, and so on, of $1 million. If the land is rezoned, the contractor must decide whether to build a shopping center or 1,400 apartments that the tentative plan shows would be possible. If she builds a shopping center, there is a 50 percent chance that she can sell the shopping center to a large department store chain for $6 million over her construction cost, which excludes the land; and there is a 50 percent chance that she can sell it to an insurance company for $5 million over her construction cost (also excluding the land). If, instead of the shopping center, she decides to build the 1,400 apartments, she places probabilities on the profits as follows: There is a 50 percent chance that she can sell the apartments to a real estate investment corporation for $2,800 each over her construction cost; there is a 50 percent chance that she can get $2,300 each over her construction cost. (Both exclude the land cost.) If the land is not rezoned, she will comply with the existing zoning restrictions and simply build 630 homes, on which she expects to make $3,800 over the construction cost on each one (excluding the cost of land). a. What is the expected value for the rezoned shopping center, if the rezoning cost is included? (Enter your answer in millions rounded to 2 decimal places.) Expected value $ n/r incorrect million b. What is the expected value for the rezoned apartments, if the rezoning cost is included? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) Expected value $ n/r incorrect million c. If the land is rezoned, what should the contractor decide? n/r incorrect d. What is the expected revenue, if the land is not rezoned? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) Expected revenue $ n/r incorrect million e. What is the expected net profit of entire project? (Negative amount should be indicated by a minus sign. Enter your answer in millions rounded to 2 decimal places.) Expected net profit $ n/r incorrect million

a. The "Do Nothing" option is included here for completeness. Rezoned shopping center (includes $1.0 rezoning costs): Point 1: Expected value = 0.50($6 million) + 0.5($5 million) - $1.0 million = $4.50 million b. Rezoned apartments: Point 2: Expected value = 0.50($3.92 million) + 0.50($3.22 million) - $1.0 million = $2.57 million c. Since a shopping center has more value, prune the apartment choice. In other words, if rezoned, build a shopping center with a profit of $4.50 million - $3 million = $1.50 million d. If not rezoned the revenue will be $2.39 million from building homes: e. Point 3: Expected value of developing the land is 0.50 × ($4.50 million) + 0.50 × ($2.39 million) = $3.45 million Expected net profit of entire project of buying and developing the land is $3.45 million - $3 million purchase cost = $0.45 million. Since this is a positive expected value, prune the option of doing nothing.

A book publisher has fixed costs of $300,000 and variable costs per book of $8.00. The book sells for $23.00 per copy. a. How many books must be sold to break even? Books to be sold b. If the fixed cost increased, would the new break-even point be higher or lower? c. If the variable cost per unit decreased, would the new break-even point be higher or lower?

a. The breakeven point is where total cost equals total revenue. Total costs include the fixed cost (FC) plus the variable cost (VC) times the number of books sold (Q). Total revenue equals the selling price (SP) times the number of books sold (Q). Solve for the value of Q that satisfies the following: FC + (VC × Q) = SP × Q, which is equivalent to: Q = FC/(SP - VC). b. Increasing the fixed cost will increase the total cost for any level of production/sales. That will require a higher level of revenue to offset the increased total costs. c. Decreasing the unit variable cost will decrease the total cost for any level of production/sales. As a result, less revenue will be required to offset the total costs.

Owen Conner works part-time packaging software for a local distribution company in Indiana. The annual fixed cost is $15,000 for this process, direct labor is $3.75 per package, and material is $4.50 per package. The selling price will be $15.00 per package. a. What is the break-even point in units? (Do not round intermediate calculations. Roundup your answer to the next whole number.) Break-even point b. How much revenue do we need to take in before breaking even? (Round your answer to the nearest dollar amount.) Break-even point

a. The breakeven point is where total cost equals total revenue. Total costs include the fixed cost (FC) plus the variable cost (VC) times the number of units sold (Q). (In this case the unit variable cost is the sum of the cost of material and the cost of labor.) Total revenue equals the selling price (SP) times the number of units sold (Q). Solve for the value of Q that satisfies the following: FC + (VC × Q) = SP × Q, which is equivalent to: Q = FC/(SP - VC). b. This is simply the breakeven point in units times the unit selling price.

AlwaysRain Irrigation, Inc., would like to determine capacity requirements for the next four years. Currently two production lines are in place for making bronze and plastic sprinklers. Three types of sprinklers are available in both bronze and plastic: 90-degree nozzle sprinklers, 180-degree nozzle sprinklers, and 360-degree nozzle sprinklers. Suppose that AlwaysRain Irrigation's marketing department will undertake an intense ad campaign for the bronze sprinklers, which are more expensive but also more durable than the plastic ones. Forecast demand for the next four years is YEARLY DEMAND 1 (in 000s) 2 (in 000s) 3 (in 000s) 4 (in 000s) Plastic 90 32 42 57 54 Plastic 180 13 15 18 14 Plastic 360 51 57 67 65 Bronze 90 10 15 15 25 Bronze 180 8 7 6 11 Bronze 360 15 15 17 19 Both production lines can produce all the different types of nozzles. The bronze machines needed for the bronze sprinklers require three operators per machine and can produce up to 16,000 sprinklers per machine. The plastic injection molding machine needed for the plastic sprinklers requires four operators per machine and can produce up to 270,000 sprinklers per machine. Three bronze machines and only one injection molding machine are available. In anticipation of the ad campaign, AlwaysRain bought a bronze machine in addition to the existing machines.

do it similar as above but in the bronze calculations instead of 3 machines assume 4 as new machine is just bought

Expando, Inc., is considering the possibility of building an additional factory that would produce a new addition to their product line. The company is currently considering two options. The first is a small facility that it could build at a cost of $5 million. If demand for new products is low, the company expects to receive $9 million in discounted revenues (present value of future revenues) with the small facility. On the other hand, if demand is high, it expects $14 million in discounted revenues using the small facility. The second option is to build a large factory at a cost of $10 million. Were demand to be low, the company would expect $12 million in discounted revenues with the large plant. If demand is high, the company estimates that the discounted revenues would be $15 million. In either case, the probability of demand being high is 0.50, and the probability of it being low is 0.50. Not constructing a new factory would result in no additional revenue being generated because the current factories cannot produce these new products. a. Calculate the NPV for the following

make the flow chart for better understanding For the small facility, NPV = 0.50($14 million) + 0.50($9 million) - $5 million = $6.5 million Do nothing, NPV = $0 For the large facility, NPV = 0.50($15 million) + 0.50($12 million) - $10 million = $3.5 million Therefore, to build the small facility.

A production facility works best when it focuses on a fairly limited set of production objectives.

true The concept of a focused factory holds that a production facility works best when it focuses on a fairly limited set of production objectives.