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Chapter 6: Managing Capacity
Introduction to Operations & Supply Chain Management (Bozarth & Handfield, 3rd Ed.)
DIRECTIONS To generate the key, put in the same 4-digit number
used to generate the homework set.
Name: *** KEY ***
Problem 1 You are the new CEO of CompuZip, a retailer that sells PCs for $2500.
You must decide whether to assemble the PCs in-house,
or have a Mexican company do it. The fixed and variable costs for each
option are shown below:
Fixed Variable
Cost Cost
1a. Suppose the PCs sell for $2500. What is the break-even volume point
for doing it in-house?
1b. At what volume level do the two capacity options have identical costs?
1c. Suppose the expected demand for PCs is 3000. Which capacity option would you
prefer from a cost perspective?
BEP (In-house) = 24.63 PCs
The two capacity options have identical costs at -335.37 PCs
Problem 2 After graduating you take a job with a local software development firm.
The time for your first and second projects are shown below.
2a. Based on just these two sample points, what is your estimated learning rate?
(Round your answer to the nearest 5%, such as 95%, 90%, 85%, etc.)
2b. According to 2a, how many hours should it take you to complete the next 5 projects?
2c. How long should it take to complete the 10th project?
Estimated learning curve: 80.00%
The “next 5″projects means projects 2 through 7:
1
Chapter 8: Managing Capacity
*** KEY ***
Problem 3 Will Stallard runs a landscaping firm. Each year, Will contracts for
labor and equipment hours from a local construction company.
The construction company has given Will three different capacity options, shown below:
Capacity Options Labor hrs Eq. hrs.
High capacity 20400 13600
Once Will has chosen a capacity option, he cannot change it later. In addition,
the cost for each capacity option is fixed. That is, Will must pay for all
labor and equipment hours he contracted for, even if he doesn’t need it all.
Will also has information concerning the amount of revenue, labor
and equipment hours needed for the “typical” landscaping job:
Will has identified three possible demand levels. These demand levels, with
their associated probabilities, are shown below:
Demand Level # Jobs Probability
3a. Determine the total cost of each capacity option.
3b. What are the nine possible outcomes Will is facing?
(Hint: One is “Will subcontracts for low capacity and demand turns out to be low”)
What is the profit (Revenue – fixed costs) associated with each outcome?
3c. Using the information from 2b, calculate the expected monetary value (EMV)
for each of the three capacity options. Show your work.
Which option would Will prefer if he wanted to maximize EMV?
Total cost
Max jobs,
labor.
Max jobs,
equip
Effective
Capacity
High capacity: $476,000 680 680 680
Medium capacity $357,000 510 510 510
Low capacity $238,000 340 340 340
Profit for each possible outcome & EMV for each capacity alternative:
Low cap / low demand: $306,000