Introduction to Operations and Supply Chain Management, 4e (Bozarth/Handfield)
Chapter 6 Managing Capacity
Learning Objective 6-1
1) Capacity is the capability of a worker, machine, work center, plant, or organization to produce
output per time period.
2) A traditional university classroom has room for 30 students and is scheduled for use during 12
consecutive one hour periods from 8:00 a.m. to 8:00 p.m. in the spring semester. Its theoretical
capacity is therefore half of its rated capacity.
3) In general, higher conformance quality reduces capacity since the extra care taken during
production slows the output rate.
4) A firm’s capacity can be limited by members of its supply chain.
5) Which of the following is NOT an appropriate measure of capacity?
A) square yards of carpet installed per hour
B) number of cars assembled per month
C) thickness of laminate on a desktop
D) printed pages per minute
6) Which of the following statements about theoretical capacity is best?
A) Theoretical capacity allows adjustments for preventive maintenance.
B) Running a factory at this level for a short time is often better than permanently raising
resource levels.
C) Theoretical capacity levels are usually lower than rated capacity levels.
D) Theoretical capacity levels take into account that machines occasionally break and that
workers occasionally call in sick.
7) A bottling machine has a theoretical capacity of 100 bottles per minute. During every ten hour
shift it operates continuously but is shut down once for 30 minutes for cleaning, inspection, and
lubrication. What is its rated capacity?
A) 100 bottles/minute
B) 95 bottles/minute
C) 90 bottles/minute
D) 85 bottles/minute
8) The maximum output capability of a system, allowing for no adjustments for scheduled or
unscheduled maintenance is the ________.
9) Define theoretical and rated capacity and name four factors that affect a company’s capacity.
Indicate how each factor impacts rated capacity.
Learning Objective 6-2
1) A firm is able to meet current demand. If it adopts a lead capacity strategy, then it is probably
making the assumption that demand will increase in the future.
2) Virtual supply chains have the advantage of efficiency, but this advantage is gained in a trade-
off with decreased flexibility.
3) Which of the following statements about capacity strategies is NOT correct?
A) Lead capacity strategy can be used to preempt competitors who might be planning to expand
their own capacity.
B) A lag capacity strategy tends to have greater productivity due to higher utilization levels.
C) A match capacity strategy tends to avoid periods of high under- or overutilization.
D) A lag capacity strategy would be well-suited for a period of high growth.
4) A lead capacity strategy has the advantage of:
A) a reduced risk of overbuilding.
B) greater productivity due to high utilization levels.
C) ensuring adequate capacity during all types of growth.
D) the ability to put off large investments as long as possible.
5) The ________ capacity strategy attempts to adjust the current capacity to a level equivalent to
the current demand.
6) A collection of companies decides to work together for a while to provide service for what
they see as a short term window of opportunity. These firms plan to coordinate their activities by
deploying sophisticated information systems to share critical data. Each of these companies is
skilled at one or two core activities — design, manufacturing, distribution, marketing, and so on.
This association of companies can be described as a(n) ________.
7) Describe the three capacity strategies and the advantages of each.
Learning Objective 6-3
1) Building rental and depreciation on capital equipment are examples of fixed costs.
2) For a given fixed cost and revenue, as the variable cost rises, the break-even point also rises.
3) In a decision tree, outcome points are under direct control of the decision maker and show the
results of choices.
4) A firm is more likely to develop the internal capacity to perform activities that are
strategically important to its success than it is to outsource those activities.
5) A ninety percent learning curve is steeper than an eighty percent learning curve.
6) Learning curve theory suggests that productivity will increase as people and systems learn to
perform tasks more efficiently.
7) An example of a variable cost is:
A) a payment to your raw materials supplier.
B) a lease payment on a piece of equipment.
C) a mortgage payment on buildings.
D) a monthly licensing fee for a software package.
8) If a firm cannot make a profit regardless of output volume, then:
A) FC > VC.
B) VC > FC.
C) VC > R.
D) BEP > VC.
9) Four entrepreneurial students want to open a shaved ice business during the coming summer.
Maxine thinks that demand will be high and therefore they should purchase a large stand and
acquire a premium ice shaving machine. Minnie feels strongly that demand will be low and that
they should purchase a tarp and some basic hand tools to work the ice. Midelia is pretty sure that
demand will fall in-between these two extremes, so they can get by with a shack and a used ice
shaving machine. Their financial wizard of the bunch, Probableah, has estimated the costs,
revenues, and likelihoods of each level of demand and created the table shown below. What is
the expected profit for this venture?
Demand
Total Revenue
Total Expenses
Probability
Low
$500
$15
.2
Medium
$2,000
$125
.3
High
$5,000
$519
.5
A) $1700
B) $2300
C) $2900
D) $3300
10) The MBA program at the University of Central Oregon features seven team-taught courses,
five credit hours apiece. Each team is composed of somewhat reluctant professors in two distinct
disciplines, each of which brings his own perspective to the topic du jour. The program is
difficult to coordinate and makes transferring course credit in and out of the program near
impossible, so the MBA Redesign Committee spends three years crafting a new program that
features twenty one courses, two credit hours each, that will unfortunately take 18 months to
complete compared to the current program’s 12 months. The current MBA program brings in
about 60 students each semester with the main selling point being the integration between
disciplines. It is thought that if the new program can be successfully marketed as an easy fit with
other MBA programs in the area, the ability to transfer credits in might attract as many as 70 new
students each semester. If the new program is unveiled but the market is still interested in
integrated courses, enrollment in the new program might drop to 40 students per semester. If this
were the case, the new courses could be scheduled at the same time in the same room and might
attract 65 students each semester (with a 0.6 probability) or might attract as few as 50 students
with a 0.4 probability. If the existing program is retained but the market is seeking courses that
are more transferable, then enrollment in the existing program might fall to 45 new students per
semester. If this happens, then the existing courses might be broken in half each night into two
classes back to back. Doing so has a .7 probability of increasing new student demand to 65 but
has a .3 probability of increasing demand to 55. The MBA Director believes that the market is
ready for a less integrated program, and she pegs the probability of that hunch at 0.6, with a 0.4
probability that the market prefers the current integrated program. What is the difference in
expected outcomes between the two alternatives?
A) 2.2 new students per semester
B) 3.2 new students per semester
C) 3.4 new students per semester
D) 4.4 new students per semester
11) A company with fixed costs of $200,000 per month believes that they have this holiday
season’s hot selling item, a towel that folds itself into a variety of shapes so you can turn your
own home into a cruise ship cabin. They believe they can sell 100,000 units and need to
determine a minimum price that will cover their fixed and variable costs, with the latter being
$45 per unit.
A) $45.20
B) $46.50
C) $46.80
D) $47.00
12) A company with fixed costs of $10,000 per month has a target price of $165 for their sole
product, a heat shield for masonry fireplaces. What level of output represents their break-even
point if their variable cost for producing is $35 per unit?
A) between 60 and 70 units
B) between 70 and 80 units
C) between 80 and 90 units
D) between 90 and 100 units
13) An entrepreneur identifies a product that he knows will sell like crazy if he can only figure
out a way to bring it to her area. The idea is so fantastic that I can’t tell you what it is, so we will
just refer to it as X. The entrepreneur has identified four ways to bring X to the masses; she can
import it, she can smuggle it, she can try to produce it on her own, and she can have a local
reputable producer make it for her. The fixed and variable costs for each of these alternatives are
shown below. What is her best course of action if she believes the demand will be 55,000 units?
Import
Produce
Outsource
Fixed Cost
$0
$500,000
$0
Variable Cost
$30
$10
$37
A) Import
B) Produce
C) Smuggle
D) Outsource
14) An entrepreneur identifies a product that he knows will sell like crazy if he can only figure
out a way to bring it to her area. The idea is so fantastic that I can’t tell you what it is, so we will
just refer to it as X. The entrepreneur has identified four ways to bring X to the masses; she can
import it, she can smuggle it, she can try to produce it on her own, and she can have a local
reputable producer make it for her. The fixed and variable costs for each of these alternatives are
shown below. Which of these methods is never the preferred alternative?
Import
Produce
Outsource
Fixed Cost
$25,000
$500,000
$0
Variable Cost
$30
$10
$32
A) Import
B) Produce
C) Smuggle
D) Outsource
15) A haberdashery conducts an exhaustive analysis and calculates their profit function as 4x2 +
3x – 57. What is their fixed cost?
A) 4
B) 4x2
C) 57
D) 3x
16) Saul Goodman represents several clients and bills by the hour at a reasonable $500 per. He
forgot to record the time it took to complete each activity, but he knows his eight hour day was
spent representing 13 clients involved in one high profile case. He also remembers that Walt told
him once that his learning curve percentage was 80%. How many hours should Saul bill his first
client?
A) one hour eight minutes and forty five seconds
B) one hour two minutes and thirty six seconds
C) fifty six minutes and twenty eight seconds
D) fifty minutes and five seconds
17) Saul Goodman represents several clients and bills at $400 per hour. He forgot to record the
time it took to complete each activity, but he knows his eight hour day was spent representing
three clients involved in one high profile case. He also remembers that Walt told him once that
his learning curve percentage was 85%. How much more should Saul bill his first client than his
third client?
A) about $277
B) about $292
C) about $303
D) about $283
18) A subdivision is planned for forty houses, each with its own in-ground swimming pool. A
contractor estimates it will take him 30 hours to build the first pool and that there is a 90%
learning curve associated with this process. How long will it take to build the last pool?
A) 27.2 hours
B) 23.9 hours
C) 20.5 hours
D) 17.1 hours
19) The first three rooms took The Painter a total of 9 hours to paint. If the learning curve rate is
85%, how long will it take The Painter to paint all 20 rooms in Stately Wayne Manor?
A) less than 20 hours
B) between 20 and 30 hours
C) between 31 and 40 hours
D) more than 40 hours
20) Which of the following statements about learning curves is best?
A) Learning improvements always follow a constant pattern.
B) Frequent design changes and reengineering have no effect on learning rates.
C) Underestimated learning effects may cause overestimation of capacity needs.
D) An eighty percent learning curve means that each unit takes twenty percent less time to
produce than its immediate predecessor.