CHAPTER 5

STRATEGIC CAPACITY PLANNING

FOR PRODUCTS AND SERVICES

PROBLEMS
1. The Crystal Sparkle Co. produces glass tumblers. The plant is designed to produce 400 tumblers
per hour, and there is one eight-hour shift per working day. However, the plant does not operate
for the full eight hours: the employees take two 15-minute breaks in each shift, one in the first
four hours and one in the second four hours, the first thirty minutes of the shift are spent raising
the kilns to the required temperature for firing glass. The plant usually produces about 10,000
tumblers per five-day workweek. Answer the following questions by adjusting the data to one
eight-hour shift.
a. What is the design capacity in tumblers?
b. What is the effective capacity in tumblers? As a percent?
c. What is the actual output in tumblers?
d. What is the efficiency ratio?
e. What is the utilization ratio?
2. The Goode and Cooke Company produces several models of frying pans. There is little
difference in the production time required for the various models; the plant is designed to produce
160 frying pans per eight-hour shift, and there are two shifts per working day. However, the
plant does not operate for the full eight hours: the employees take two 12-minute breaks in each
shift, one in the first four hours and one in the second four hours; two hours per week are devoted
to cleaning the factory and performing maintenance on the machines; one four-hour period every
four weeks is devoted to the meeting of the quality circle. The plant usually produces about
3,500 frying pans per four-week period. You may ignore holidays in solving this problem.
Answer the following questions by adjusting the data to a four-week time period.
a. What is the design capacity in frying pans?
b. What is the effective capacity in frying pans? As a percent?
c. What is the actual output?
d. What is the efficiency?
e. What is the utilization?
f. Re-work the problem using a time period of one eight-hour shift.
3. The selling price of the product is $199.95. The variable costs per unit are:
Labor $60.25
Raw material 25.70
Purchased component 21.50
Variable overhead 17.50
The fixed costs total $300,000 per year. Perform a breakeven analysis of this company.
a. What is the total revenue function?
b. What is the total cost function?
c. What is the profit function?
d. What is the breakeven point in units of the product?
e. What is the revenue at the breakeven point?
f. What is the income at the breakeven point?
g. Estimate the profit when 9,000 units of the product are sold in a year.
a. How many units must be sold for the company to make $900,000?
4. The Lade & Bach Company produces office chairs. The price of the chairs is $99.75 and the
variable cost per chair is $49.75. The following fixed costs are incurred:
Depreciation of plant and equipment per year $20,000
Property taxes per year 12,000
Manager’s salary and fringe benefits per month 5,200
Perform a breakeven analysis of this company:
a. What is the total revenue function?
b. What is the total cost function?
c. What is the profit function?
d. What is the breakeven point in number of chairs?
e. What is the revenue at the breakeven point?
f. What is the income at the breakeven point?
g. Estimate the profit when 1,500 chairs are produced in a year.
h. How many chairs must be sold for the company to make $75,000 in a year?
5. (One step beyond) PC Fun & Games, Inc., produces a game for personal computers on a CD-
ROM disk, which is entitled: Armageddon, the Final Battle. The company sells the disk to
software retailers for $20.00, each, with a 5% discount for orders of 100 copies or more; virtually
every retailer takes the discount. The variable costs of producing the disks are low, totaling only
$7.00 each for the blank disk onto which the game is copied, the wages of the machine operator,
and the packaging.
The game has become a best seller, and the production manager must plan to expand the capacity
of the plant to turn out CD-ROM disks. CD-ROM disks are produced on a machine which makes
copies of a master disk, one at a time. Each copy takes fifteen minutes, which includes inserting
the blank disk, imprinting the game, and removing the finished disk.
At present, the Company has four machines; each machine cost $80,000 and has a service life of
five years. The Company operates two eight-hour shifts per day, 50 weeks per year, and the
machines require servicing and adjustments for one hour every day.
New machines can be purchased for $85,000. They also have a service life of five years and
require one hour of servicing, but they can make copies in ten minutes. Because of the savings in
copying time, the variable cost will drop to $6.00 per disk.
a. What is the annual effective capacity of one present machine?
b. What is the annual depreciation expense of one present machine? (Use straight line
depreciation expense = cost/service life.)
c. What is the present breakeven point?
 d. What is the annual effective capacity of one new machine?
e. What will be the annual effective capacity of the plant if one new machine is purchased?
f. What will be the new average variable cost per unit?
g. What will be the new breakeven point?
h. Suppose a second new machine is purchased. What will be the annual capacity of the plant?
i. What will be the new average variable cost per unit?
j. What will be the new breakeven point?
6. The following diagram shows a 4-step process that begins with Operation 1 and ends with
Operation 4. The rates shown in each box represent the effective capacity of that operation.
a. Determine the capacity of this process:
b. If you could increase the capacity of one operation, and your goal was to increase the capacity
of the entire process, which one would you increase, and by how much? Explain your reasoning.2
22/hr. 18/hr. 25/hr. 30/hr.

Operation 1 Operation 2 Operation 3 Operation 4

   
7. The following diagram describes a process that consists of eight separate operations, with sequential
relationships and capacities (units per hour) as shown.
a. What is the current capacity of the entire process?
b. If you could increase the capacity of only two operations through process improvement efforts,
which two operations would you select, how much additional capacity would you strive for in
each of those operations, and what would the resulting capacity of the entire process be?

20/hr. 17/hr. 21/hr.

   38/hr.

18/hr. 11/hr. 12/hr. 

  