Capacity and

SUPPLEMENT
Constraint
Management 7
PowerPoint presentation to accompany
Heizer and Render
Operations Management, Eleventh Edition
Principles of Operations Management, Ninth Edition

PowerPoint slides by Jeff Heyl

© 2014
© 2014
Pearson
Pearson
Education,
Education,
Inc.Inc. S7 - 1
 Capacity
► The throughput, or the number of units
a facility can hold, receive, store, or
produce in a period of time
► Determines
fixed costs
► Determines if
demand will
be satisfied
► Three time horizons
© 2014 Pearson Education, Inc. S7 - 2
 Design and Effective Capacity
► Design capacity is the maximum
theoretical output of a system
► Normally expressed as a rate
► Effective capacity is the capacity a firm
expects to achieve given current
operating constraints
► Often lower than design capacity

© 2014 Pearson Education, Inc. S7 - 3

 Utilization and Efficiency
Utilization is the percent of design
capacity actually achieved
Utilization = Actual output/Design capacity

Efficiency is the percent of effective

capacity actually achieved
Efficiency = Actual output/Effective capacity

© 2014 Pearson Education, Inc. S7 - 4

 Bakery Example
Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

© 2014 Pearson Education, Inc. S7 - 5

 Bakery Example
Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

© 2014 Pearson Education, Inc. S7 - 6

 Bakery Example
Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

Utilization = 148,000/201,600 = 73.4%

© 2014 Pearson Education, Inc. S7 - 7

 Bakery Example
Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

Utilization = 148,000/201,600 = 73.4%

Efficiency = 148,000/175,000 = 84.6%

© 2014 Pearson Education, Inc. S7 - 8

 Bakery Example
Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

Utilization = 148,000/201,600 = 73.4%

Efficiency = 148,000/175,000 = 84.6%

© 2014 Pearson Education, Inc. S7 - 9

 Bakery Example
Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts
Efficiency = 84.6%
Efficiency of new line = 75%

Expected Output = (Effective Capacity)(Efficiency)

= (175,000)(.75) = 131,250 rolls

© 2014 Pearson Education, Inc. S7 - 10

 Bakery Example
Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts
Efficiency = 84.6%
Efficiency of new line = 75%

Expected Output = (Effective Capacity)(Efficiency)

= (175,000)(.75) = 131,250 rolls

© 2014 Pearson Education, Inc. S7 - 11

 Bottleneck Analysis and the
Theory of Constraints
► Each work area can have its own unique
capacity
► Capacity analysis determines the
throughput capacity of workstations in a
system
► A bottleneck is a limiting factor or constraint
► A bottleneck has the lowest effective capacity
in a system

© 2014 Pearson Education, Inc. S7 - 12

 Break-Even Analysis

► Technique for evaluating process and

equipment alternatives
► Objective is to find the point in dollars
and units at which cost equals
revenue
► Requires estimation of fixed costs,
variable costs, and revenue

© 2014 Pearson Education, Inc. S7 - 13

 Break-Even Analysis
► Fixed costs are costs that continue even
if no units are produced
► Depreciation, taxes, debt, mortgage
payments
► Variable costs are costs that vary with
the volume of units produced
► Labor, materials, portion of utilities
► Contribution is the difference between
selling price and variable cost

© 2014 Pearson Education, Inc. S7 - 14

 Break-Even Analysis
► Revenue function begins at the origin
and proceeds upward to the right,
increasing by the selling price of each
unit
► Where the revenue function crosses
the total cost line is the break-even
point

© 2014 Pearson Education, Inc. S7 - 15

 Break-Even Analysis
–
Total revenue line
900 –

800 –
Break-even point Total cost line
700 – Total cost = Total revenue
Cost in dollars

600 –

500 –

400 – Variable cost

300 –

200 –

100 – Fixed cost

–
| | | | | | | | | | | |
0 100 200 300 400 500 600 700 800 900 1000 1100
Figure S7.5
Volume (units per period)
© 2014 Pearson Education, Inc. S7 - 16
 Break-Even Analysis
Assumptions
► Costs and revenue are linear
functions
► Generally not the case in the real
world
► We actually know these costs
► Very difficult to verify
► Time value of money is often
ignored
© 2014 Pearson Education, Inc. S7 - 17
 Break-Even Analysis
BEPx = break-even point x = number of units
in units produced
BEP$ = break-even point TR = total revenue = Px
in dollars F = fixed costs
P = price per unit V = variable cost per unit
(after all TC = total costs = F + Vx
discounts)
Break-even point occurs when

TR = TC F
or BEPx =
P–V
Px = F + Vx

© 2014 Pearson Education, Inc. S7 - 18

 Break-Even Analysis
BEPx = break-even point x = number of units
in units produced
BEP$ = break-even point TR = total revenue = Px
in dollars F = fixed costs
P = price per unit V = variable cost per unit
(after all TC = total costs = F + Vx
discounts)
F Profit = TR - TC
BEP$ = BEPx P = P
P–V = Px – (F + Vx)
F = Px – F – Vx
= (P – V)/P
= (P - V)x – F
F
=
1 – V/P
© 2014 Pearson Education, Inc. S7 - 19
 Break-Even Example
Fixed costs = $10,000 Material = $.75/unit
Direct labor = $1.50/unit Selling price = $4.00 per unit

F $10,000
BEP$ = =
1 – (V/P) 1 – [(1.50 + .75)/(4.00)]
$10,000
= = $22,857.14
.4375

© 2014 Pearson Education, Inc. S7 - 20

 Break-Even Example
Fixed costs = $10,000 Material = $.75/unit
Direct labor = $1.50/unit Selling price = $4.00 per unit

F $10,000
BEP$ = =
1 – (V/P) 1 – [(1.50 + .75)/(4.00)]
$10,000
= = $22,857.14
.4375

F $10,000
BEPx = = = 5,714
P–V 4.00 – (1.50 + .75)

© 2014 Pearson Education, Inc. S7 - 21

 Break-Even Example
50,000 –

Revenue
40,000 –
Break-even
point Total
30,000 –
Dollars

costs

20,000 –

Fixed costs
10,000 –

–
| | | | | |
0 2,000 4,000 6,000 8,000 10,000
Units

© 2014 Pearson Education, Inc. S7 - 22

▶ Capacity alternatives may involve step costs,
which are costs that increase stepwise as
potential volume increases.
▶ The implication of such a situation is the possible
occurrence of multiple break-even quantities.
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© 2014 Pearson Education, Inc. Instructor Slides
S7 - 23
 24
© 2014 Pearson Education, Inc. Instructor Slides
S7 - 24
▶ Cost-volume analysis is a viable tool for comparing
capacity alternatives if certain assumptions are satisfied
▶ One product is involved
▶ Everything produced can be sold
▶ The variable cost per unit is the same regardless of volume
▶ Fixed costs do not change with volume changes, or they are
step changes
▶ The revenue per unit is the same regardless of volume
▶ Revenue per unit exceeds variable cost per unit

5-25
© 2014 Pearson Education, Inc. Instructor Slides
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