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43) The ________ is the set of consecutive time periods considered for planning purposes.
44) A ________ is the difference between demand and current capacity.
45) ________ are more appropriate measures of capacity in situations where a task that is initially difficult
and time-consuming to perform becomes second-nature and short in duration.
46) The ________ is the act of doing nothing and losing orders from any demand that exceeds capacity, or
incurs costs because capacity is too large.
47) What are the four steps involved in making capacity decisions?
48) A printing company works on three types of printing jobs, each of which could be produced on the
same model printing machine. The predicted annual demands and typical order sizes are shown in the
table. The company has 2,000 production hours available each year and requires a 10% capacity cushion
to allow for preventive maintenance, breakdowns, and other unforeseen circumstances. How many
printing machines must they have under these circumstances?
Job Type
Job A
Job B
Job C
Demand
6,000
4,000
5,000
Process time per unit
.8
.75
.25
Average order size
40
100
50
setup time (hours)
1
.75
.5
49) A printing company works on three types of printing jobs, each of which could be produced on the
same model printing machine. The predicted annual demands and typical order sizes are shown in the
table. The company has 2,000 production hours available each year and requires a 10% capacity cushion
to allow for preventive maintenance, breakdowns, and other unforeseen circumstances. They have floor
space for five printing machines. If the time needed to set up a printing machine to switch from one job to
the next is identical for all three job types, what must their setup time be to achieve their required output?
Job Type
Job A
Job B
Job C
Demand
6,000
4,000
5,000
Process time per unit
.8
.75
.25
Average order size
40
100
50
50) The single milling machine at Fred's Manufacturing was severely overloaded last year. The plant
operates 8 hours per day, 5 days per week, and 50 weeks per year. Management prefers a capacity
cushion of 20 percent. Two major types of products are routed through the milling machine. The annual
demand for product A is 4,000 units and 3,000 units for product B. The batch size for A is 20 units and 30
units for B. The standard processing time for A is 0.5 hours/unit and 0.8 for B. The standard setup time for
product A is 2 hours and 8 hours for product B. How many new milling machines are required if Fred's
does not resort to any short-term capacity options?
51) The Union Manufacturing Company is producing two types of products: A and B. The demand
forecasts, batch size, and time standards for the Mark I operation follow:
Product A
Product B
Demand forecast (units/yr)
1,000
4,000
Batch size (units/batch)
20
10
Processing time (hr/unit)
3.2
4.5
Setup time (hr/batch)
10
20
The company works 250 days per year and operates 2 shifts, each covering 8 hours. If a 20 percent
capacity cushion is maintained, how many new Mark I machines are required if Union does not resort to
any short-term capacity options?
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52) Larry's Wickets, Inc. is producing two types of products: A and B. Both are produced at the same
machining operation. Because of demand uncertainties, the operations manager obtained three demand
forecasts (pessimistic, expected, and optimistic). The demand forecasts, batch sizes (units/batch),
processing times (hr/unit), and setup times (hr/batch) follow.
The machines operate on two 8-hour shifts, 5 days per week, and 50 weeks per year. The manager wants
to maintain a 20 percent capacity cushion.
a. What is the minimum number of hours required of the machining equipment for the next year?
b. How many hours of capacity can the company expect from each machine?
c. What is the minimum number of machines needed (assuming no reliance on short-term options)?
d. What is the maximum number of machines needed (assuming no reliance on short-term options)?
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Copyright © 2019 Pearson Education, Inc.
Answer:
a. 81,800 hours
b. 3,200 hours
c. 26 machines
d. 34 machines
Difficulty: Challenging
Keywords: capacity cushion, capacity requirement
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and manufacturing
processes
AACSB: Analytical Thinking
Learning Obj.: Identify a systematic four-step approach for determining long-term capacity requirements and
associated cash flows.
43
53) 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%. What are the pre-tax cash flows for the two alternatives compared to the base case
of doing nothing for the next five years, and what action, if any, should the company take?
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Copyright © 2019 Pearson Education, Inc.
Answer: The following table summarizes demand and output capabilities for the two alternatives:
Alternative #1 Net Present Value (in $000s)
= -200 + 30/1.15 + 60/(1.15)2 + 90/(1.15)3 + 120/(1.15)4 + 150/(1.15)5
= -200 + 26.1 + 45.4 + 59.2 + 68.6 + 74.6 = $73.9
Alternative #2 Net Present Value (in $000s)
= -100 + 30/1.15 + 60/(1.15)2 + (75 - 200)/(1.15)3 + 120/(1.15)4 + 150/(1.15)5
= -100 + 26.1 + 45.4 - 82.2 + 68.6 + 74.6 = $32.5
Both alternatives have a positive net present value after five years at a discount rate of 15%. However,
Alternative #1 has a higher net present value after the five-year period ($73,900 versus $32,500) and
should therefore be the alternative selected.
Difficulty: Challenging
Keywords: evaluating alternatives, net present value, pre-tax cash flow, discount rate
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and manufacturing
processes
AACSB: Analytical Thinking
Learning Obj.: Identify a systematic four-step approach for determining long-term capacity requirements and
associated cash flows.
45
54) Burdell Labs is a diagnostic laboratory that does various tests (blood tests, urine tests, etc.) for doctors'
offices in the Indianapolis area. Test specimens are picked up at the doctors' offices and are transported to
the testing facility, with uniform arrivals throughout the day. All tests go through two testing centers in
the testing facility, Test Center A and Test Center B. A has a current capacity of 1,000 units per week, and
B is capable of 1,500 units per week. The facility operates 50 weeks per year. This year (year 0), test
volumes are expected to reach 1,000 units per week. Growth is projected at an additional 200 units each
week through year 5 (i.e., 1,200 per week in year #1, 1,400 per week in year #2, etc.). Pre-tax profits are
expected to be $5 per test throughout the 5-year planning period. Two alternatives are being considered:
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%. What are the pre-tax cash flows for the two alternatives compared to the base case
of doing nothing for the next five years, and what action, if any, should Burdell take?
46
Answer: The following table summarizes demand and output capabilities for the two alternatives:
4.4 Tools for Capacity Planning
1) Waiting line models are often used for capacity planning.
2) Which of the following descriptions about waiting line models is best?
A) They account for major events such as competitor actions.
B) They account for the random, independent behavior of many customers.
C) They assume that each branch can give the highest expected payoff.
D) They deal with the certainty and stability in demand.
3) What information would managers use to choose the best cost-effective capacity to balance customer
service with the cost of adding capacity?
A) decision trees
B) diseconomies of scale
C) capacity cushion
D) waiting line models
4) When future demand is uncertain and sequential decisions are involved in capacity planning, a
manager should use a:
A) waiting line model.
B) cash flow analysis.
C) decision tree.
D) gap analysis.
Figure 4.1
5) A manager weighs three options for capacity cushion as depicted in Figure 4.1. If the dollar amounts
expressed in the figure are cash flows, which option is optimal?
A) large cushion
B) medium cushion
C) small cushion
D) Not enough information is given to select an option.
6) A manager weighs three options for capacity cushion as depicted in Figure 4.1. If the dollar amounts
expressed in the figure are cash flows, what is the value of the optimal decision?
A) $11,700
B) $11,500
C) $12,300
D) $10,500
7) A manager weighs three options for capacity cushion as depicted in Figure 4.1. If the dollar amounts
expressed in the figure are costs, what is the optimal decision?
A) large cushion
B) medium cushion
C) small cushion
D) Not enough information is given to select an option.
8) A capacity decision in a call center, such as the number of customer service representatives to answer
the phone during a peak period, can be addressed using a(n) ________.
9) Extremely complex service capacity problems for which there are no optimizing equations should be
analyzed using ________.
10) ________ are useful capacity analysis tools when the future is uncertain and capacity decisions can be
made in a sequential fashion.
11) Capacity planning requires a demand forecast for an extended period of time into the future. What
concerns would you have regarding an extended forecast as a capacity planner?
12) What is a waiting line model, and what information can it provide?
