Virtual Company Tour

5-1

Quiz 2 Coverage & Schedule

5. Capacity Planning
a. Cost Volume Analysis
6. Location Planning
7. Facilities Layout
a. Types of Manufacturing Process
b. Types of Layout
c. Line Balancing
d. Operations Sequence Analysis
8. Design of Work Systems
a. Principles of Work Design
b. Measurement of Work
c. Developing Standard Costs
9. Learning Curves
QUIZ 2 (15%)

Session 9 (Feb 11)

Session 10 (Feb 16)
Session 11 (Feb 16, 18)

Session 12-14
(Feb 23, Mar 2, 4)

Session 15 (Mar 9, Mon)

5-2

Capacity Planning
For Products and
Services

McGraw-Hill/Irwin

Copyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Group Activity Virtual Tour

Answer the ff. question:
Comment on the design capacity of
the Phaeton factory?
Comment on the utilization of the VW
Phaeton factory?
What justification can be given for the
utilization figure?
Video
5-4

Learning Objectives

Explain the importance of capacity

planning.
Discuss ways of defining and
measuring capacity.
Describe the determinants of
effective capacity.
Discuss the major considerations
related to developing capacity
alternatives.
5-5

Capacity Planning
Capacity is the upper limit or ceiling on the
load that an operating unit can handle.
Capacity also includes

Equipment
Space
Employee skills

The basic questions in capacity handling

are:

What kind of capacity is needed?

How much is needed?
When is it needed?
5-6

Capacity DEA!
Design capacity

maximum output rate or service capacity an

operation, process, or facility is designed for

Effective capacity

Design capacity minus allowances such as

personal time, maintenance, and scrap

Actual output

rate of output actually achievedcannot

exceed effective capacity

5-7

Efficiency and Utilization

Actual output

Efficiency =
Effective capacity

Actual output
Utilization =
Design capacity
Actual output is always the NUMERATOR
Both measures expressed as percentages
5-8

Example 1 car wash business

Design capacity = 50 cars/day
Effective capacity = 40 cars/day
Actual output = 36 cars/day

Actual output

36 units/day

Efficiency =

= 90%
Effective capacity

Utilization =

Actual output
Design capacity

40 units/ day
=

36 units/day
50 units/day

= 72%

5-9

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

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

2011 Pearson Education, Inc. publishing as Prentice Hall

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

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

2011 Pearson Education, Inc. publishing as Prentice Hall

S7 - 11

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%

2011 Pearson Education, Inc. publishing as Prentice Hall

S7 - 12

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%

2011 Pearson Education, Inc. publishing as Prentice Hall

S7 - 13

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%
2011 Pearson Education, Inc. publishing as Prentice Hall

S7 - 14

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%
2011 Pearson Education, Inc. publishing as Prentice Hall

S7 - 15

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

2011 Pearson Education, Inc. publishing as Prentice Hall

S7 - 16

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

2011 Pearson Education, Inc. publishing as Prentice Hall

S7 - 17

Calculating Processing Requirements

(Example 2)
Standard
processing time
per unit (hr.)

Product

Annual
Demand

Processing time
needed (hr.)

#1

400

5.0

2,000

#2

300

8.0

2,400

#3

700

2.0

1,400
5,800

If annual capacity is 2000 hours, then we need three machines to

handle the required volume: 5,800 hours/2,000 hours = 2.90 machines
5-18

SAMPLE PROBLEM SOLVING

5-19

Problem # 1
P1. 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, and 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.
b.
c.
d.
e.

What is the design capacity of the plant in tumblers, per shift?

What is the effective capacity in tumblers per shift?
What is the actual output in tumblers per shift?
What is the efficiency ratio?
What is the utilization ratio?
5-20

Solution
a. Design capacity = 8 hrs. x 400 tumblers = 3,200 tumblers per 8-hour shift.
b. Effective capacity = Design capacity - Nonproductive activities.
Design capacity - 8.0 hrs.
Less: Breaks -.5 hrs.
Heat-up - .5 hrs.
Net productive time: 8 - 0.5 - 0.5 = 7.0 hrs.
Effective capacity = 7 hrs. x 400 tumblers = 2,800 tumblers.
c. Actual output = 10,000/5 = 2,000 tumblers per 8-hour shift. (This is an average
output. In reality, there could be variation; some shifts could exceed 2,000
tumblers while others fall short.)
d. Efficiency = Actual output/Effective capacity = (2000)/2800 x 100 = 71.43%.

e. Utilization = Actual output/Design capacity = (2000)/3200 x 100 = 62.50%.

5-21

Problem # 2
P2.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?
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.
5-22

Solution # 2
P2.

a. Design capacity = 160 frying pans x 2 shifts x 20 working days = 6,400 frying pans per
four weeks.
b. 160/8 = 20 frying pans per hour.
8 hrs. x 2 shifts x 20 working days = 320 hrs. available.
Less
Breaks: (12 min. x 2 per shift x 2 shifts x 20 working days)/60 =
16 hrs.
Cleaning: 2 hrs. x 4 weeks
8 hrs.
Quality Circle
4 hrs.
Therefore, Net productive time is:
292 hrs.
Effective capacity = 292 hrs. x 20 frying pan per hour = 5,840 frying pans per four weeks.
c. Actual output = 3,500 frying pans.
d. Efficiency = Actual output/Effective Capacity = (100)(3500)/5840 = 59.93%.
e. Utilization = Actual output/Design capacity = (100)(3500)/6400 = 54.69%.
f. In terms of one 8-hour shift: Design capacity = 160 frying pans.
Effective capacity = 5840/40 = 146 frying pans.
The percentage answers will be the same as above.

5-23

Bottleneck Operation
Figure 5.2

Machine #1

Machine #2

Bottleneck operation: An operation

in a sequence of operations whose
capacity is lower than that of the
other operations

10/hr

10/hr

Machine #3

Bottleneck
Operation
10/hr

Machine #4

10/hr

30/hr

Bottleneck Operation
Bottleneck

Operation 1
20/hr.

Operation 2
10/hr.

Operation 3
15/hr.

10/hr.

Maximum output rate

limited by bottleneck

5-25

Economies of Scale
Figure 5.5

Average cost per unit

Minimum cost & optimal operating rate are

functions of size of production unit.

Small
plant

Medium
plant

Large
plant

Output rate

5-26

Average unit cost

(dollars per room per night)

Economies and
Diseconomies of Scale

25 - room
roadside motel

50 - room
roadside motel

Economies
of scale

25

Diseconomies
of scale

50
Number of Rooms

2011 Pearson Education, Inc. publishing as Prentice Hall

75 - room
roadside motel

75
Figure S7.2
S7 - 27

Evaluating Alternatives
Cost-volume analysis

Break-even point (BEP)

Financial analysis

Cash flow
Present value

Decision theory
Waiting-line analysis
Simulation
5-28

Break-Even Analysis

Total revenue line

900
800

Cost in dollars

700

Break-even point
Total cost = Total revenue

Total cost line

600
500
Variable cost

400

300
200
100

Fixed cost

|
|
|
|
|
|
|
|
|
|
|

0 100 200 300 400 500 600 700 800 900 1000 1100
|

Figure S7.5

Volume (units per period)

2011 Pearson Education, Inc. publishing as Prentice Hall

S7 - 29

Break-Even Problem with Step

Fixed Costs
Figure 5.7A

3 machines
2 machines
1 machine
Quantity
Step fixed costs and variable costs
5-30

Break-Even Problem with Step

Fixed Costs
Figure 5.7B
$

BEP

TC

BEP2

TC
3
TC
2

1
Quantity

Multiple break-even points

5-31

Break-Even Analysis
BEPx = break-even point in
units
BEP$ = break-even point in
dollars
P = price per unit (after
all discounts)

x = number of units
produced
TR = total revenue = Px
F = fixed costs
V = variable cost per unit
TC = total costs = F + Vx

Break-even point occurs when

TR = TC
or
Px = F + Vx
2011 Pearson Education, Inc. publishing as Prentice Hall

F
BEPx =
P-V

S7 - 32

Break-Even Analysis
BEPx = break-even point in
units
BEP$ = break-even point in
dollars
P = price per unit (after
all discounts)

x = number of units
produced
TR = total revenue = Px
F = fixed costs
V = variable cost per unit
TC = total costs = F + Vx

BEP$ = BEPx P
F
=
P
P-V
F
=
(P - V)/P
F
=
1 - V/P

Profit = TR - TC
= Px - (F + Vx)
= Px - F - Vx
= (P - V)x - F

2011 Pearson Education, Inc. publishing as Prentice Hall

S7 - 33

Break-Even Example
Fixed costs = $10,000
Direct labor = $1.50/unit

Material = $.75/unit
Selling price = $4.00 per unit

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

2011 Pearson Education, Inc. publishing as Prentice Hall

S7 - 34

Break-Even Example
Fixed costs = $10,000
Direct labor = $1.50/unit

Material = $.75/unit
Selling price = $4.00 per unit

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

$10,000
F
BEPx =
=
= 5,714
4.00 - (1.50 + .75)
P-V
2011 Pearson Education, Inc. publishing as Prentice Hall

S7 - 35

Break-Even Example
50,000

Revenue

Dollars

40,000

Break-even
point

30,000

Total
costs

20,000

Fixed costs

10,000
|

2,000

4,000

2011 Pearson Education, Inc. publishing as Prentice Hall

6,000
Units

8,000

10,000

S7 - 36

Problem # 3
P3.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 cost-volume (breakeven)
analysis of this company.
a.
b.
c.
d.
e.
f.
g.
h.

State total revenue as a formula, for any given volume of Q products.

State total cost as a formula, for any given volume of Q products.
State total profit as a formula, for any given volume of Q products.
What is the breakeven point in units of the product?
How much revenue is earned at the breakeven point?
How much profit is earned at the breakeven point?
Estimate the profit when 9,000 units of the product are sold in a year.
How many units must be sold for the company to make $900,000?
5-37

Solution # 3
P3.

a. Total Revenue = R x Q = 199.95Q.

b. Total cost = FC + VC x Q = 300000 + (60.25 + 25.70 + 21.50 + 17.50)Q = 300000 +
124.95Q.
c. Profit per year = R x Q - (VC x Q + FC) = 199.95Q - 124.95Q - 300000 = 75Q - 300000.
d. QBEP = FC/(R - VC) = 300000/75 = 4,000 units.
e.
f.
g.
h.

Revenue at the break-even point = 4000(199.95) = $799,800.

Profit at the break-even point = $0. This is the definition of breaking even.
Profit at 9,000 units = 75(9000) - 300000 = $375,000.
Number of units = 75Q-300,000 = $900,000
Q = 16,000 units.

5-38

Problem # 4
P4.

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

Managers salary and fringe benefits per month

$5,200

Perform a breakeven analysis of this company:

a. State total revenue as a formula, for any given volume of Q products.
b. State total cost as a formula, for any given volume of Q products.
c. State total profit as a formula, for any given volume of Q products.
d. What is the breakeven point in units of the product?
e. How much revenue is earned at the breakeven point?
f. How much profit is earned 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?

5-39

Solution # 4
P4.

a.
b.
c.
d.
e.
f.
g.
h.

Total revenue = R x Q = 99.75Q.

Total cost = FC + VC x Q = 94400 + 49.75Q.
Profit per year = R x Q - (VC x Q + FC) = 99.75Q - (49.75Q + 94400) = 50Q - 94400.
QBEP = FC/(R - VC) = 94400/50 = 1,888 chairs.
Revenue at the break-even point = 99.75(1888) = $188,328.
Profit at the break-even point = $0.
Profit at 1,500 chairs = 50(1500) - 94400 = -$19,400, which is a net loss.
Number of chairs = 50Q 94400 = $75,000
Q = 3,388 chairs.
5-40

Forecasting Capacity
Requirements
Long-term vs. short-term capacity needs
Long-term relates to overall level of capacity
such as facility size, trends, and cycles
Short-term relates to variations from
seasonal, random, and irregular fluctuations
in demand

5-41

Planning Service Capacity

Need to be near customers

Capacity and location are closely tied

Inability to store services

Capacity must be matched with timing of

demand

Degree of volatility of demand

Peak demand periods

5-42

In-House or Outsourcing
Outsource: obtain a good or service
from an external provider

1.
2.
3.
4.
5.
6.

Available capacity
Expertise
Quality considerations
Nature of demand
Cost
Risk
5-43

Developing Capacity Alternatives

1. Design flexibility into systems
2. Take stage of life cycle into account

3. Take a big picture approach to capacity

changes

Bottleneck operations

4. Prepare to deal with capacity chunks

5. Attempt to smooth out capacity
requirements
6. Identify the optimal operating level
5-44