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14) Use the information in Table 4.1. The company works 250 days per year and operates two shifts, each
covering 8 hours. If a 15 percent capacity cushion is maintained, how many hours of capacity can the
company expect from each of its Mark I machines?
A) fewer than 3,000
B) between 3,000 and 3,500
C) between 3,501 and 4,000
D) more than 4,000
15) Use the information in Table 4.1. How many Mark I machines are required to produce Union
Manufacturing's yearly production?
A) fewer than 4 machines
B) more than 4 but fewer than or equal to 6 machines
C) more than 6 but fewer than or equal to 8 machines
D) more than 8 machines
16) A standard work year is 2,080 hours at the Luther Mill and it takes about 2 hours to fill a customer
order. The manager at the mill is always concerned about employee idle time, so he aims for a capacity
cushion of two percent. Last year saw 15,000 customer orders at the mill and the manager has a new
Mercedes in mind as a company car, so he hopes that there is an increase of 10% in customer orders for
next year. How many workers will the manager need to have at the mill next year?
A) 10
B) 13
C) 16
D) 19
17) A standard work year is 2,000 hours at the Luther Mill and it takes about an hour and a half to fill a
customer order. The manager at the mill is always concerned about employee idle time, so he aims for a
capacity cushion of two percent. Last year saw 15,000 customer orders at the mill and the manager has a
new John Deere in mind as a company car, so he hopes that there is an increase of 15% in customer orders
for next year. How many workers will the manager need to have at the mill next year?
A) 10
B) 13
C) 16
D) 19
18) A standard work year is 2,000 hours at the Luther Mill and it takes about an hour and a half to fill a
customer order. Last year saw 15,000 customer orders at the mill and the manager has a new John Deere
in mind as a company car, so he hopes that there is an increase of 15% in customer orders for next year. If
the manager hires fourteen workers, what is the capacity cushion?
A) 7.6%
B) 8.2%
C) 6.9%
D) 8.8%
19) A standard work year is 2,000 hours at the Luther Mill and it takes about an hour and a half to fill a
customer order. Last year saw 25,000 customer orders at the mill and the manager has a rebuilt Ford 9N
in mind as a company car, so he hopes that there is an increase of 2% in customer orders for next year. If
the manager hires twenty workers, what is the capacity cushion?
A) 3.8%
B) 3.1%
C) 5.1%
D) 4.3%
20) The Southeast Manufacturing Company is producing two types of products: A and B. Demand
forecasts for next year and other production-related information are provided in the following table:
Product A
Product B
Demand forecast (units/yr)
4,000
12,000
Batch size (units/batch)
80
150
Processing time (hr/unit)
2.5
2.0
Setup time (hr/batch)
18
24
Both of these products are produced at the same workstation, called the Automatic Lathe. Currently, the
company has 12 automatic lathes, and financial constraints prevent any expansion for the next year. It
works 250 days per year with two 8-hour shifts and desires a 25 percent capacity cushion. Which one of
the following alternatives will allow next year's demand to be fully covered?
A) Do nothing.
B) Increase the capacity cushion to 30 percent.
C) Increase the batch size of product B to 300 units.
D) Decrease the capacity cushion by 1 percent.
21) The lock box department at Bank 21 handles the processing of monthly loan payments to the bank,
monthly and quarterly premium payments to a local insurance company, and bill payments for 85 of the
bank's largest commercial customers. The payments are processed by machine operators, with one
operator per machine. An operator can process one payment in 0.25 minute. Setup times are negligible in
this situation. A capacity cushion of 20 percent is needed for the operation. The average monthly (not
annual) volume of payments processed through the department currently is 400,000. However, it is
expected to increase by 20 percent. The department operates eight hours per shift, two shifts per day, 260
days per year. How many machines (not operators) are needed to satisfy the new total processing
volume? (Round up to the next whole integer.)
A) fewer than 7
B) 7
C) 8
D) more than 8
22) A company's production facility, consisting of two identical machines, currently caters only to
product A. The annual demand for the product is 4,000 units. Management has now decided to introduce
another product, B, which uses the same facilities as that of product A. Product B has an annual demand
of 2,000 units. In view of the uncertainties involved in producing two products, management desires to
have an overall 10 percent capacity cushion. Given the following additional information, how many more
machines are required? (Assume 8 hours/shift, 2 shifts/day, 250 days/year, and that no overtime is
allowed).
A) No additional machines are necessary.
B) One additional machine is necessary.
C) Two additional machines are necessary.
D) More than two additional machines are necessary.
23) The Northern Manufacturing Company is producing products A and B, using the same machine
called MASAC27A. Demand forecasts for next year and other production-related information are
provided in the following table.
Product A
Product B
Demand forecast (units/yr)
4,000
12,000
Batch size (units/batch)
80
150
Processing time (hr/unit)
2.5
2.0
Setup time (hr/batch)
16
12
The company works 250 days per year and operates 2 shifts each day, each shift covering 8 hours. If 25
percent of capacity cushion is maintained throughout the year, how many machines (MASAC27A) does
the company need next year to meet the demand? (Round your answer up to the next whole machine.)
A) fewer than 11 machines
B) 11 machines
C) 12 machines
D) more than 12 machines
24) George P. Burdell owns a hot tub store that is experiencing significant growth. Burdell is trying to
decide whether to expand the store's capacity, which currently is at $750,000 in sales per quarter. He is
thinking about expanding to the $850,000 level. The before-tax profit from additional sales is 20 percent.
Sales are seasonal, with peaks in the spring and summer quarters. Forecasts of capacity requirements,
expressed in ($000) sales per quarter, for next year (year 2) are:
Quarter
($000)
1
720
2
800
3
890
4
690
Demand in year 3 and beyond is expected to exceed $850,000 per quarter. Burdell is considering
expansion at the end of the fourth quarter of this year (year 1). How much would before-tax profits in
year 2 increase because of this expansion?
A) less than $28,000
B) more than $28,000 but less than $32,000
C) more than $32,000 but less than $36,000
D) more than $36,000
25) Sleep Tight Motel has the opportunity to purchase an adjacent plot of land. Building on this land
would increase their capacity from the current sales level of $515,000/year to $600,000/year. Sleep Tight
experiences a 20 percent before-tax profit margin. It wishes to estimate the additional before-tax profits
that the expansion will produce. Using the following information, how much more before-tax cash flow
would be realized just in year 10 alone?
Year
Capacity Requirement
(Annual Sales)
1
$515,000
2
$517,000
3
$520,000
4
$525,000
5
$540,000
6
$560,000
7
$565,000
8
$575,000
9
$600,000
10
$620,000
A) less than or equal to $20,000
B) greater than $20,000 but less than or equal to $25,000
C) greater than $25,000 but less than or equal to $30,000
D) greater than $30,000
26) Innovative Inc. is experiencing a boom for the products it has introduced recently. The estimated
annual sales projected for the next five years are given in the following table. The current capacity is
equivalent to only $100 million sales. The company is considering the alternative of expanding capacity to
an equivalent of $250 million sales. Assume a 25 percent pretax profit margin. What is the increase in
total pretax cash flow (summed over all years) that would be enjoyed because of the expansion?
Year
Annual Sales
(in $ million)
1
100
2
140
3
170
4
200
5
250
A) less than or equal to $40 million
B) more than $40 million but less than or equal to $70 million
C) more than $70 million but less than or equal to $100 million
D) more than $100 million
29
27) John Owen owns a drugstore that is experiencing significant growth. Owen is trying to decide
whether to expand its capacity, which currently is $200,000 in sales per quarter. Sales are seasonal.
Forecasts of capacity requirements, expressed in sales per quarter for the next year, follow.
Quarter
($000)
1
240
2
180
3
220
4
260
Owen is considering expanding capacity to the $250,000 level in sales per quarter. The before-tax profit
margin from additional sales is 15 percent. How much would before-tax profits increase next year
because of this expansion?
A) less than $15,000
B) more than $15,000 but less than $16,000
C) more than $16,000 but less than $17,000
D) more than $17,000
Scenario 4.5
The T. H. King Company has introduced a new product line that requires two work centers, A and B for
manufacture. Work Center A has a current capacity of 10,000 units per year, and Work Center B is
capable of 12,500 units per year. This year (year 0), sales of the new product line are expected to reach
10,000 units. Growth is projected at an additional 1,000 units each year through year 5. Pre-tax profits are
expected to be $30 per unit throughout the 5-year planning period. Two alternatives are being
considered:
1) Expand both Work Centers A and B at the end of year 0 to a capacity of 15,000 units per year, at a
total cost for both Work Centers of $200,000;
2) Expand Work Center A at the end of year 0 to 12,500 units per year, matching Work Center B, at a
cost of $100,000, then expanding both Work Centers to 15,000 units per year at the end of year 3, at an
additional cost at that time of $200,000.
The King Company will not consider projects that don't show a 5th year positive net present value using
a discount rate of 15%.
28) Use the information in Scenario 4.5. What is the pre-tax cash flow (net present value) for alternative #1
compared to the base case of doing nothing for the next five years?
A) negative pre-tax cash flow
B) more than $0 but less than $40,000
C) more than $40,000 but less than $80,000
D) more than $80,000
29) Use the information in Scenario 4.5. What is the pre-tax cash flow (net present value) for alternative #2
compared to the base case of doing nothing for the next five years?
A) negative pre-tax cash flow
B) more than $0 but less than $40,000
C) more than $40,000 but less than $80,000
D) more than $80,000
30) Use the information in Scenario 4.5. What action, if any, should the King Company take?
A) Do nothing–neither alternative provides a positive net present value after five years.
B) Select Alternative #1.
C) Select alternative #2.
D) Either alternative may be selected, since the positive net present values are the same after five years.
1) Expand both Test Centers A and B at the end of year 0 to a capacity of 2,000 units per week, at a total
cost for both Test Centers of $300,000;
2) Expand Test Center A at the end of year 0 to 1,500 units per week, matching Test Center B, at a cost of
$100,000, then expanding both Test Centers to 2,000 units per year at the end of year 3, at an additional
cost at that time of $250,000.
Burdell Labs will not consider projects that don't show a 5th year positive net present value using a
discount rate of 15%.
31) Use the information in Scenario 4.6. What is the pre-tax cash flow (net present value) for alternative #1
compared to the base case of doing nothing for the next five years?
A) negative pre-tax cash flow
B) more than $0 but less than $80,000
C) more than $80,000 but less than $160,000
D) more than $160,000
32
32) Use the information in Scenario 4.6. What is the pre-tax cash flow (net present value) for alternative #2
compared to the base case of doing nothing for the next five years?
A) negative pre-tax cash flow
B) more than $0 but less than $80,000
C) more than $80,000 but less than $160,000
D) more than $160,000
33) Use the information in Scenario 4.6. What action, if any, should the Burdell Labs take?
A) Do nothing–neither alternative provides a positive net present value after five years.
B) Select Alternative #1.
C) Select alternative #2.
D) Either alternative may be selected, since the positive net present values are the same after five years.
1) Expand both Work Centers X and Y at the end of year 0 to a capacity of 60,000 units per year, at a
total cost for both Work Centers of $500,000;
2) Expand Work Center X at the end of year 0 to 55,000 units per year, matching Work Center Y, at a
cost of $300,000, then expanding both Work Centers to 60,000 units per year at the end of year 2, at an
additional cost at that time of $350,000.
The Sharp Company will not consider projects that don't show a 3rd year positive net present value using
a discount rate of 20%.
34) Use the information in Scenario 4.7. What is the pre-tax cash flow (net present value) for alternative #1
compared to the base case of doing nothing for the next five years?
A) negative pre-tax cash flow
B) more than $0 but less than $100,000
C) more than $100,000 but less than $200,000
D) more than $200,000
35) Use the information in Scenario 4.7. What is the pre-tax cash flow (net present value) for alternative #2
compared to the base case of doing nothing for the next five years?
A) negative pre-tax cash flow
B) more than $0 but less than $100,000
C) more than $100,000 but less than $200,000
D) more than $200,000
36) Use the information in Scenario 4.7. What action, if any, should the Sharp Company take?
A) Do nothing–neither alternative provides a positive net present value after three years.
B) Select Alternative #1.
C) Select alternative #2.
D) Either alternative may be selected, since the positive net present values are the same after three years.
Scenario 4.8
The Summerville Vitamin Company manufactures bottles of animal-shaped chewable vitamins for
children. This product line requires two work centers, tablet manufacturing and packaging. The tablet
manufacturing work center has a current capacity of 140,000 bottles per month, and packaging is capable
of 100,000 units per month. This year (year 0), monthly sales of the product line are expected to reach
100,000 units. Growth per month is projected at an additional 25,000 units through year 4 (i.e., 125,000 per
month in year #1, 150,000 per month in year #2, etc.). Pre-tax profits are expected to be $5 per unit
throughout the 4-year planning period. Two alternatives are being considered:
1) Expand both tablet manufacturing and packaging at the end of year 0 to a capacity of 200,000 units
per month, at a total cost for both work centers of $2,250,000;
2) Expand packaging at the end of year 0 to 140,000 units per year, matching tablet manufacturing, at a
cost of $1,200,000, then expanding both work centers to 200,000 units per month at the end of year 2, at an
additional cost at that time of $1,400,000.
Summerville will not consider projects that don't show a 4th year positive net present value using a
discount rate of 25%.
37) Use the information in Scenario 4.8. What is the pre-tax cash flow (net present value) for alternative #1
compared to the base case of doing nothing for the next four years?
A) less than or equal to $5.1 million
B) more than $5.1 million but less than $5.3 million
C) more than $5.3 million less than $5.5 million
D) more than $5.5 million
38) Use the information in Scenario 4.8. What is the pre-tax cash flow (net present value) for alternative #2
compared to the base case of doing nothing for the next four years?
A) less than or equal to $5.1 million
B) more than $5.1 million but less than $5.3 million
C) more than $5.3 million less than $5.5 million
D) more than $5.5 million
39) Use the information in Scenario 4.8. What action, if any, should Summerville take?
A) Find another option–neither alternative provides a positive net present value after four years.
B) Select Alternative #1.
C) Select alternative #2.
D) Either alternative may be selected, since the positive net present values are the same after four years.
40) In the context of capacity requirements planning, which of these phrases best describes the term base
case?
A) the do-nothing alternative
B) thinking outside the box
C) working smarter, not harder
D) working harder, not smarter
41) A process's ________ is what its capacity should be for some future time period to meet the demand of
its customers, allowing for the desired capacity cushion.
42) A process's ________ is the length of time it takes to switch from making one type of product to
another.
