Imchap 005

Chapter 05 - Strategic Capacity Planning for Products and Services
CHAPTER 05
STRATEGIC CAPACITY PLANNING FOR PRODUCTS AND
SERVICES
Solutions
Actual output 7
1. a. Utilizatio n x100% 70.00%
Design capacity 10
Actual output 7
Efficiency x100% 87.50%
Effective capacity 8
Actual output 4
b. Utilizatio n x100% 66.67%
Design capacity 6
Actual output 4
Efficiency x100% 80.00%
Effective capacity 5
c. This is not necessarily true. If the design capacity is relatively high, the utilization could be
low even though the efficiency is high.
2. Given:
Effective capacity = .50 (Design Capacity)
Actual output = .80 (Effective capacity)
Actual output desired = 8 jobs per week
By substitution:
Actual output = (.80) x [(.50) (Design capacity)]
Actual output = (.40) (Design capacity)
Re-arranging terms:
Actual output
Design Capacity
.40
By substitution (Actual output desired = 8 jobs from above):
8
Design capacity 20 jobs
.40
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Education.
3. Given:
FC = $9,200/month
v= $ .70/unit
R = $ .90/unit
FC $9,200
a. QBEP 46,000 units
R v $.90 $.70
b. Profit = R x Q (FC + v x Q)
1. P61,000 = $.90(61,000) [$9,200 + $.70(61,000)] = $3,000
2. P87,000 = $.90(87,000) [$9,200 + $.70(87,000)] = $8,200
Specified profit FC $16,000 9,200
c. Q 126,000 units
R v $.90 / unit $.70 / unit
Total Revenue $23,000
d. Total Revenue = R x Q, so Q = 25,555.56 units
R $.90 / unit
e. $100,000 TR = $90,000 @ Q = 100,000 units

TC = $79,200 @ Q = 100,000 units TR
Cost TC
$50,000
$9,200
0
100,000
Volume
1.
(units)
1. Given: FC R v
A: $40,000 $15/unit $10/unit
B: $30,000 $15/unit $11/unit
FC $40,000
a. QBEP Q BEP,A 8,000 units
R v $15 / unit $10 / unit
$30,000
QBEP , B 7,500 units
$15 / unit $11/ unit
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b. Profit = Q(R v) FC
[As Profit] [Bs Profit]
Q($15 $10) $40,000 = Q($15 $11) $30,000
$5Q - $40,000 = $4Q - $30,000
$5Q - $4Q = - $30,000 + $40,000
Q = 10,000 units
c. PA = 12,000($15 $10) $40,000 = $20,000 [A is higher]

PB = 12,000($15 $11) $30,000 = $18,000
5. Given:
Demand = 30,000 = Q
FC = $25,000
v = $.37/pen
a. Given: R = $1.00/pen
FC $25,000
QBEP 39,682.54 units
R v $1.00 $.37
b. Given: Demand = 30,000 units. Specified profit = $15,000
Specified profit FC $15,000 $25,000

Q
R v R $.37
$40,000
Q
R $.37
By substitution:
$40,000
30,000
R $.37
30,000 x (R - $.37) = $40,000
30,000R - $11,100 = $40,000
30,000R = $40,000 + $11,100
30,000R = $51,100
R = $51,100/30,000
R = $1.71 [rounded up]
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6. a. Cost for Plan A: $20 + $.45(120) + $.20(40) = $82

Cost for Plan B: $20 + $.55(120) + $.15(40) = $92
Cost for Plan C: $20 + $80 + $.40(0) = $100
b.
Plan B
$140
Plan A
$120
Plan C
$100
Monthly cost
$80
$60
$40
$20
0 200 300
Minutes of daytime calls (evening minutes ignored)
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Education.
c. Considering only daytime cost functions:

Plan A = $20 + $.45D
Plan B = $20 + $.55D
Plan C (up to 200 minutes) = $20 + $80 = $100
Plan C (over 200 minutes) = $20 + $80 + $.40 (D - 200)
Collecting terms:
Plan C (over 200 minutes) = $100 + $.40D - $50 = $50 + $0.40D
Note: We can see that Plan A dominates Plan B over all volumes; therefore, we
can omit Plan B from our analysis.
Comparing Plan A to Plan C over the range 1 200 minutes:

Determine the indifference point between Plan A & Plan C:
$20 + $.45D = $100
$.45D = $80
D = $80/$.45
D = 177.78 minutes
Plan A is optimal for 0 to less than 177.78 daytime minutes.

Plan C is optimal for more than 177.78 minutes up to 200 minutes.
Comparing Plan A to Plan C over the range > 200 minutes:

Looking at the graph, we can see that Plan C is preferred for more than 200 minutes.
Conclusion: Plan A is preferred from 0 to less than 177.78 daytime minutes.

Plan C is preferred for more than 177.78 daytime minutes.
We are indifferent between the two plans at 177.78 daytime minutes.
d. Given:
Plan A Cost for Daytime & Evening Minutes: $20 + $.45D + $.20E
Plan B Cost for Daytime & Evening Minutes: $20 + $.55D + $.15E
Setting these equal and solving for D:

$20 + $.45D + $.20E = $20 + $.55D + $.15E
$.45D + $.20E = $.55D + $.15E
$.45D - $.55D = $.15E - $.20E
-$.10D = -$.05E
D = $-.05E/-$.10
D = .5E
D is half as much as E is. For example, if E = 100 minutes, then D = 50 minutes.
This is the same as stating that D = 1/3 [(50/(100 + 50)] of the total minutes.
Conclusion: At 33.33% of total call minutes made in the daytime, she would be indifferent
between Plan A & Plan B.
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Education.
7. Given:
Source FC v TC
Process A $160,000 $5 160,000 + 5Q
Process B 190,000 4 190,000 + 4Q
Vendor 7 7Q
We can begin by graphing the three total cost functions as
shown below. We can see the Vendor costs less until its
function intersects with that of Process B.
Find the indifference point between the Vendor & Process B:
7Q = 190,000 + 4Q
7Q 4Q = 190,000
3Q = 190,000
Q = 190,000/3
Q = 63,333.33 units
Beyond this point, we can see that Process B will be preferred
due to its lower cost.
The Vendor is preferred between 1 to less than 63,333.33 units.
Process B is preferred for more than 63,333.33 units.
Cost ($000)
500 A B
400
300
200
Vendor
100
0
10 20 30 40 50 60 70 80
Q (x1000)
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Education.
8. Given:
Source FC v
Internal 1 $200,000 $17
Internal 2 240,000 14
Vendor A 20 up to 30,000 units
Vendor B 22 for 1 to 1,000; 18 each if larger amount
Vendor C 21 for 1 to 1,000; 19 each for additional units
a. TC for 10,000 units TC for 20,000 units

Int. 1: 200,000 + 17(10,000) = $370,000 200,000 + 17(20,000) = $540,000
Int. 2: 240,000 + 14(10,000) = $380,000 240,000 + 14(20,000) = $520,000
Vend A: 20(10,000) = $200,000 20(20,000) = $400,000
Vend B: 18(10,000) = $180,000 18(20,000) = $360,000
Vend C: 21,000 + 19(9,000) = $192,000 21,000 + 19(19,000) = $382,000
At 10,000 units, total cost is lowest when using Vendor B. At 20,000 units, total cost is
lowest when using Vendor B.
b. Given:
Cost functions for each alternative:
Internal 1: $200,000 + $17Q
Internal 2: $240,000 + $14Q
Vendor A: $20Q (Q 30,000)
Vendor B: $22Q (Q 1,000) $18Q for all units when Q > 1,000
Vendor C: $21Q (Q 1,000) $21Q + $19(Q - 1,000) when Q > 1,000
First, we analyze the range of 1 - 1,000 units:
Vendor A exhibits lower total cost over this range than do Vendor B and Vendor C; therefore,
we can eliminate Vendors B & C from consideration for this range.
Next, we could graph the costs functions of the remaining three options for the range of 1
1,000 units:
Internal 1: $200,000 + $17Q
Internal 2: $240,000 + $14Q
Vendor A: $20Q
As shown in the Excel chart below, Vendor A provides the lowest total cost over this entire
range. If the manager is going to purchase between 1 to 1,000 units, Vendor A is preferred.
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300,000
250,000
Int. 2
200,000 Int. 1
$ 150,000
100,000
50,000
Vend A
0
0 1000
Units
Second, we analyze the range of 1,001 units or more to determine the total costs if we purchase >
1,000 units:
Total Cost Functions (when purchasing 1,001 units or more):

Internal 1: $200,000 + $17Q
Internal 2: $240,000 + $14Q
Vendor A: $20Q ( 30,000 units)
Vendor B: $18Q
Vendor C: $21Q + $19(Q 1,000)
Looking at the cost functions above, we can see that Vendor B dominates Vendor A and Vendor
C. Therefore, we can eliminate Vendor A and Vendor C from further consideration.
We must compare the total costs of Internal 1, Internal 2, and Vendor B when purchasing more
than 1,000 units.
We can plot these costs functions on a graph as shown in the Excel chart below:
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Education.
1,600,000
1,400,000 Int. 1
1,200,000
1,000,000
$ 800,000
600,000 Int. 2
400,000 Vend B
200,000
0
0 10000 20000 30000 40000 50000 60000 70000
Units
We can see in the chart above that Vendor B has the lowest total cost until its total cost function
intersects the total cost function of Internal 2.
Our next step is to determine the indifference point between Vendor B and Internal 2.
Set the two cost functions equal and solve for Q:

$18Q = $240,000 + $14Q
$18Q - $14Q = $240,000
$4Q = $240,000
Q = $240,000/$40
Q = 60,000 units
Therefore, Vendor B has lower total cost in the range of 1,001 units 59,999 units.
Internal 2 has lower total cost > 60,000 units.
Summary:
Purchase Quantity:
1 1,000 units Prefer Vendor A
1,001 59,999 units Prefer Vendor B
60,000 units Indifferent between Vendor B & Internal 2
> 60,000 units Prefer Internal 2
Note: Internal 1 and Vendor C are never best.
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Education.
9. Given: Actual output will be 225 per day per cell. 240 working days/year. Projected annual demand =
150,000 within 2 years.
Annual capacity per cell = 225 units/day x 240 days/year = 54,000

150,000
Cells : 2.78, round up to 3 cells
54,000
10. Given: Our objective is to select one type of machine to purchase. We are given the data below:
Purchasing
Machine Type Cost/Machine
1 $10,000
2 $14,000
Annual Process Time per Process Time per

Demand Unit on Type 1 Unit on Type 2
Product (units) (min.) (min.)
001 12,000 4 6
002 10,000 9 9
003 18,000 5 3
a. Number of machines of each type needed if the machines will operate 60 minutes per hour, 8
hours per day, 250 days per year.
Using Machine Type 1:
Each Machine Type 1 is available 250 x 8 x 60 = 120,000 minutes per year
Processing Requirements using Machine Type 1:

Product 001: 12,000 x 4 min. = 48,000 min.
Product 002: 10,000 x 9 min. = 90,000 min.
Product 003: 18,000 x 5 min. = 90,000 min.
Total = 228,000 min.
Number of Machine Type 1 Needed = processing time needed / processing time capacity per unit
= 228,000 / 120,000 = 1.9 = 2 machines (round up)
Capacity = 2 x 120,000 minutes = 240,000 minutes
Capacity cushion = 240,000 228,000 = 12,000 minutes
Using Machine Type 2:

Each Machine Type 2 is available 250 x 8 x 60 = 120,000 minutes per year
Processing Requirements using Machine Type 2:

Product 001: 12,000 x 6 min. = 72,000 min.
Product 002: 10,000 x 9 min. = 90,000 min.
Product 003: 18,000 x 3 min. = 54,000 min.
Total = 216,000 min.
Number of Machine Type 2 Needed = processing time needed / processing time capacity per unit
= 216,000 / 120,000 = 1.8 = 2 machines (round up)
Capacity = 2 x 120,000 minutes = 240,000 minutes
Capacity cushion = 240,000 216,000 = 24,000 minutes
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b. If we faced high uncertainty of annual demand, we would select the type of machine with the
higher capacity cushion (Machine Type 2). If we faced low uncertainty of annual demand, we
would select the type of machine with the lower capacity cushion (Machine Type 1).
c. Given: Operating costs = $6/hour for Type 1 & $5/hour for Type 2
Purchase Cost for Machine Type 1 = 2 machines x $10,000/machine = $20,000

Total Operating Time for Machine Type 1 = 228,000 minutes = 3,800 hours
Total Operating Cost = 3,800 hours x $6/hour = $22,800
Total Cost = $20,000 + $22,800 = $42,800
Purchase Cost for Machine Type 2 = 2 machines x $14,000/machine = $28,000

Total Operating Time for Machine Type 2 = 216,000 minutes = 3,600 hours
Total Operating Cost = 3,600 hours x $5/hour = $18,000
Total Cost = $28,000 + $18,000 = $46,000
Conclusion: Machine Type 1 would minimize total cost.
11. a. Given: 10 hrs. or 600 min. of operating time per day per machine.
250 days x 600 min. = 150,000 min. per year operating time per machine.
Machine purchase costs: A = $40,000; B = $30,000; C = $80,000.
Total processing time by machine

Product A B C
1 48,000 64,000 32,000
2 48,000 48,000 36,000
3 30,000 36,000 24,000
4 60,000 60,000 30,000
Total 186,000 208,000 122,000
186,000
NA 1.24 2 machines
150,000
208,000
NB 1.38 2 machines
150,000
122,000
NC .81 1 machine
150,000
Options:
Buy two A machines at a total purchase cost of 2 x $40,000 = $80,000.
Buy 2 B machines at a total purchase cost of 2 x $30,000 = $60,000.
Buy 1 C machine at a total purchase cost of $80,000.
Conclusion: We should buy 2 of the B machines at a total cost of $60,000.
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b. Given: Operating Costs: A = $10/hour/machine; B = $11/hour/machine; C =

$12/hour/machine.
Total cost for each type of machine:
A (2): 186,000 min. / 60 min./hour = 3,100.00 hrs. x $10 = $31,000 + $80,000 = $111,000
B (2): 208,000 min. / 60 min./hour = 3,466.67 hrs. x $11 = $38,133 + $60,000 = $98,133
C(1): 122,000 min. / 60 min./hour = 2,033.33 hrs. x $12 = $24,400 + $80,000 = $104,400
Conclusion: Buy 2 Bsthese have the lowest total cost.
12. Given: R = $45 per customer, v = $20 per customer, each machine can process 100 customers per
day, fixed cost for one machine = $2,000 per day total; and fixed cost for two machines = $3,800 per
day total.
FC
a. FC Range QBEP
Rv
One machine $2,000 1 to 100 2000 / (45 20) = 80
Two machines 3,800 101 to 200 3800 / (45 20) = 152
b. Given: Estimated demand = 90 to 120 customers per day
Because BEP for one machine is 80 and 80 < 90, and because BEP for two machines is 152 and
152 > 120, we should purchase one machine, because even at the upper limit of demand (120
customers), we have not reached the break-even point associated with two machines.
Conclusion: Purchase one machine.
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13. Given: R = $5.95/car, v = $3/car, Fixed Cost for one line = $6,000/month, Fixed Cost for two lines =
$10,500/month, each line can process 15 cars/hour, & the car wash is open 300 hours/month.
Determine the break-even for each option:

To do this, we will need to convert fixed costs per month to fixed costs per hour.
One line fixed cost per hour = $6,000/300 = $20
Two line fixed cost per hour = $10,500/300 = $35
One Line:
FC $20
QBEP 6.78 cars
R v $5.95 $3.00
Two Lines:
FC $35
QBEP 11.86 cars
R v $5.95 $3.00
If demand averages between 14 and 18 cars an hour, either option would break even. Therefore, we
need to determine the net profit per hour for each possible demand value as shown below.
Volume No. of Lines Used Net Profit per Hour
14 1 $21.30 = 14 (5.95 3) 20
15 1 24.25 = 15 (5.95 3) 20
16 1 24.25 = 15 (5.95 3) 20
17 1 24.25 = 15 (5.95 3) 20
18 1 24.25 = 15 (5.95 3) 20
Volume No. of Lines Used Net Profit per Hour
14 2 $6.30 = 14 (5.95 3) 35
15 2 9.25 = 15 (5.95 3) 35
16 2 12.20 = 16 (5.95 3) 35
17 2 15.15 = 17 (5.95 3) 35
18 2 18.10 = 18 (5.95 3) 35
Conclusion: Choose one line. Net profit per hour always is higher using
one line for the given demand range of 14 to 18 cars per hour.
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14. Given : We have a 4-step process with the following effective capacity for each operation:
Operation 1 = 12/hr, Operation 2 = 15/hr, Operation 3 = 11/hr, Operation 4 = 14/hr.
a. The capacity of the process is determined by the operation with the lowest effective capacity:
Operation 3 = 11/hr.
b. Given:
Option 1: Increase the capacity of Operation 1 by 15%.
Option 1 Process Capacity:

Operation 1 New Capacity = 12 x 1.15 = 13.8/hr.
Operation 1 = 13.8/hr, Operation 2 = 15/hr, Operation 3 = 11/hr, Operation 4 = 14/hr.
The capacity of the process is determined by the operation with the lowest effective capacity:
Operation 3 = 11/hr. Increase in capacity = 0/hr.

Operation 1 = 12/hr, Operation 2 = 16.5/hr, Operation 3 = 11/hr, Operation 4 = 14/hr.
Operation 3 = 11/hr. Increase in capacity = 0/hr.

Operation 1 = 12/hr, Operation 2 = 15/hr, Operation 3 = 12.1/hr, Operation 4 = 14/hr.
Operation 1 = 12/hr. Increase in capacity = 1/hr (12/hr 11/hr).
Conclusion: Select Option 3. Increasing the capacity of Operation 3 by 10% yields the
greatest increase in process capacity (1/hr).
15. Given: Two parallel lines feed their combined output to Operation 7.
Upper Line Capacities: Operation 1 = 18/hr, Operation 2 = 15/hr, Operation 3 = 16/hr.
Lower Line Capacities: Operation 4 = 17/hr, Operation 5 = 15/hr, Operation 6 = 17/hr.
Capacity of Operation 7 = 20/hr. Capacity of Operation 8 = 24/hr.
a. Capacity of the system:
Capacity of Upper Line = 15/hr.

Capacity of Lower Line = 15/hr.
Combined Capacity = 30/hr.
The two lines feed 30/hr to Operation 7. Operation 7 has capacity of 20/hr and Operation 8
has capacity of 24/hr. Operation 7 has the lowest capacityit can handle only 20/hr.
Conclusion: Capacity of the system = 20/hr.
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b. Given: The capacity of one operation could be increased.

Process capacity is limited by Operation 7; therefore, increase the capacity of Operation 7 by
4 units/hour from 20 units/hour to 24 units/hour at which time Operation 8 also becomes a
bottleneck.
13. Given: Three parallel lines feed their combined output to Operation 10.
Middle Line Capacities: Operation 4 = 20/hr, Operation 5 = 18/hr, Operation 6 = 18/hr.
Capacity of Upper Line = 17/hr.

Capacity of Middle Line = 18/hr.
The three lines feed 50/hr to Operation 10. Operation 10 has capacity of 51/hr and Operation 11
has capacity of 54/hr. The lowest capacity is the combined capacity of the three lines = 50/hr.
17. Given: Two parallel lines feed their combined output to Operation 7.
a. Capacity of Upper Line = 10/hr.

The two lines feed 15/hr to Operation 7. Operation 7 has capacity of 34/hr and Operation 8
has capacity of 30/hr. The combined capacity of the two lines is lowest at 15/hr.
b. Increasing Capacity of One Operation:
Process capacity is limited by the combined capacity of the two lines (15/hr).
The Upper Line Capacity = 10/hr and is determined by Operation 2. If the capacity of
Operation 2 were increased by 5/hr to 15/hr (the same as Operation 1), then the Upper Line
Capacity would increase by 5/hr, the Combined Capacity would increase by 5/hr, and process
capacity would increase by 5/hr to 20/hr.
The Lower Line Capacity = 5/hr and is determined by Operation 4. If the capacity of
Operation 4 were increased by 3/hr to 8/hr (the same as Operation 5), then the Lower Line
Capacity would increase by 3/hr, the Combined Capacity would increase by 3/hr, and process
capacity would increase by 3/hr to 18/hr.
Conclusion: Increase the capacity of Operation 2 by 5/hr. The resulting process capacity
would be 20/hr.
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18. Given: New equipment initial cost = $12,000. Annual savings = $1,500.
19. Given: New equipment initial cost = $18,000. Annual savings = $2,400.
20. Given: Initial cost of remodeling = $25,000. Annual savings = $3,000 in Year 1, $4,000 in Year
2, & $5,000 thereafter.
Savings in 2 years = $3,000 + $4,000 = $7,000. That leaves us with $18,000 to recoup at $5,000
per year.
Conclusion: Total time to recoup initial cost = 2 + 3.6 = 5.6 years.
Case: Outsourcing of Hospital Services
1. The advantages of having the outsourced work performed within the hospital are that the
hospitals workers felt a connection with the hospital, still felt a sense of ownership in their jobs,
and did not need to be trained to perform the food service work. Perhaps in a larger hospital with
a larger staff, this connection between workers and the hospital might not be an issue. In addition,
there might be large cost savings involved.
2. There could be a cost savings in having an outside firm manage the service, or the motivation for
outsourcing could be avoidance of the burden of managing housekeeping.
3. The reason for asking another hospital to join it would be economies of scale and lower costs for
laundry service.
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Education.
Enrichment Module: Solving Capacity Planning Problems

Capacity-planning problems can be classified in a number of different ways. One such classification for
intermediate and short-range problems is given below:
1. Output capacity determination
2. Input capacity determination
3. Capacity-demand match (input or output)
The categories listed above can involve either manufacturing or service problems. The solutions to the
following realistic examples will provide an easy and an intuitive way to comprehend and solve capacity-
planning problems.
Problem 1 Manufacturing Example

(Output capacity determination and capacity-demand match)
A battery manufacturing plant normally operates two eight-hour shifts per day and 6 days per week. The
manufacturer can produce 375 units per hour. Over the next four weeks, the aggregate demand for the
batteries is given in the following table.
Week 1 2 3 4
Demand 30,000 32,000 38,000 40,000
a. Calculate the weekly capacity of the plant.
b. If the firm attempts to produce the demanded quantity, at what percentage of the capacity would
it be operating each week?
c. Determine the Level production schedule and the resulting average inventory for the 4-week
period. Assume that no shortages are allowed and the current inventory is zero and desired ending
inventory in week 4 also is zero.
d. Determine the Chase production schedule and the resulting average inventory for the 4-week
period. Assume that no shortages are allowed and the current and desired ending inventory in
week 4 is zero.
e. Based on your answers to part c and d, discuss the trade-off between Level and the Chase
production plans.
Note: Part a of this problem can be classified as output capacity determination while parts b
through e deal with capacity-demand match.
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Problem 2 Service Example

(Output capacity determination)
A small grocery store has a total of four regular checkout lines and one express checkout line. Recently
on Sundays the store has been experiencing either excessive idle time for cashiers or excessively long
customer waiting lines. The results of a recent time study performed by a management consulting
company showed that the average service time for express and regular checkout lines are 3 and 10
minutes respectively. As the next step in analyzing the problem, the manager of the grocery store wants to
determine the estimated capacity of the store on Sundays in terms of total number of customers. Currently
the store is open from 6 a.m. to midnight on Sundays. The express checkout line is always open while
there is only one regular line open from 6 a.m. to 9 a.m. and also only one regular line open from 9 p.m.
to midnight. There are two regular checkout lines open from 9 a.m. to noon and also from 6 p.m. to 9 p.m.
All four regular lines are open between noon and 6 p.m.
a. Determine the current capacity of the store in total number of customers for Sundays.
b. Assume that the store manager decides to reduce the number of regular lines from 2 to 1 between
7 p.m. and 9 p.m. and closes the express line between 6 a.m. and 8 a.m. and 10 p.m. and
midnight. What is the revised capacity for Sundays?
Problem 3 Manufacturing Example

(Input capacity determination number of resources needed)
A video equipment manufacturer produces videotapes and DVDs. The manufacturing facility operates
two eight-hour shifts per day for 6 days a week. The unit manufacturing time is 6 minutes for each
videotape and 8 minutes for each DVD.
a. Given that machine operators work at 80% efficiency, determine the number of workers needed
to produce 5000 videotapes and 2500 DVDs per week.
b. Given that machines have 95% efficiency, determine the number of machines needed to produce
5000 videotapes and 2500 DVDs per week.
c. Assume that the number of workers is sufficient, what is the maximum number of videotapes and
the maximum number of DVDs that can be manufactured with 15 machines.
d. Assume that the number of machines is sufficient, what is the maximum number of videotapes
and the maximum number of DVDs that can be manufactured with 20 workers.
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Problem 4 Manufacturing Example with Multiple Products and Multiple Machines

Among many other products, a firm manufactures three different electronic components (A, B, C) on any
of three different machines (1, 2, 3). The quarterly forecasted demand for the three components is given in
Table 1.
Table 1
Quarterly Forecasted Demand by Product Type
Season
Component Winter Spring Summer Fall
A 8,000 20,000 12,000 6,400
B 4,000 12,000 8,000 5,600
C 9,600 19,200 14,400 7,200
Table 2 displays the unit production time for each product on each machine.
Table 2
Unit Production Time (in hours)
Component
Machine A B C
1 .25 .50 .40
2 .10 .30 .15
3 .45 .20 .35
Interpreting Table 2, we can state that each unit of product A takes 15 minutes (.25 x 60 min.) to process
on machine 1, while it takes 12 minutes (.20 x 60 minutes) to process one unit of product B on machine 3.
a. Determine the maximum number of machine hours demanded for each quarter machine
combination.
b. The production manager has determined that the amount of productive time available for each
machine per quarter is 600 hours. Determine the maximum number of each machine type needed
to be dedicated to produce all components in each quarter.
c. Does there appear to be seasonal variation in demand? Explain.
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Solution to Problem 1 Manufacturing Example

(Output capacity determination and capacity-demand match)
a. The number of units/week = (375 units/hr.) (8 hrs/shift) (2 shifts/day) (6 days/week)
The number of units/week = 36,000 batteries
b.
Week 1 2 3 4
Forecasted
30,000 32,000 38,000 40,000
demand
Capacity 36,000 36,000 36,000 36,000
% of capacity
83.33% 88.89% 105.56% 111.11%
utilized
c. In determining the Level production plan, if the demand is less than or equal to the production
capacity, we simply determine the average demand for the four-week period and use the average
demand as our production quantity. However, if the average demand is above capacity, then we
can try either to expand capacity, to delay the order, or to reduce the quantity. Because in this
instance the average demand is less than capacity in each week, we can use the average demand
as our production quantity.
30,000 32,000 38,000 40,000
Average demand 35,000
4
The Level production plan and the resulting ending inventory for each week are given in the
following table.
Week 0 1 2 3 4
Forecasted demand 30,000 32,000 38,000 40,000
Capacity 36,000 36,000 36,000 36,000
Production 35,000 35,000 35,000 35,000
Ending Inventory 0 5,000 8,000 5,000 0
Average inventory = 18,000 / 4 = 4,500 units.

d. In determining the Chase production plan, we attempt to match production with demand unless
there is insufficient capacity. The amount of shortage from the latest period with insufficient
capacity is scheduled for production in the latest period with excess supply. In our problem, week
4 has a potential shortage of 4,000 units and week 2 is the latest period with excess capacity of
4,000 units. Therefore, week 4s shortage is scheduled for production in week 2. Likewise, week
3 has a potential shortage of 2,000 units, which is scheduled for production in week 1.
5-20
Education.
The Chase production plan and the resulting ending inventory for each week are given in the
following table.
Week 0 1 2 3 4
Forecasted demand 30,000 32,000 38,000 40,000
Capacity 36,000 36,000 36,000 36,000
Production 32,000 36,000 36,000 36,000
Ending Inventory 0 2,000 6,000 4,000 0
Average inventory = 12,000/4 = 3,000 units.

e. The Chase production plan results in fewer units in inventory, while the Level production
plan results in more uniform production, thus less hiring and layoff costs.
Solution to Problem 2 Service Example

(Output capacity determination)
a. Hourly capacity of the express line = (60 minutes) / (3 minutes per cust.) = 20 customers
Hourly capacity of the regular line = (60 minutes) / (10 minutes per cust.) = 6 customers
Capacity of the express line for Sundays = (20 customers) x (18 hours) = 360 customers
Capacity of the regular line:
From 6 a.m. to 9 a.m. = (6 customers/hr) (3 hours) (1 line) = 18 customers
From 9 a.m. to noon = (6 customers/hr) (3 hours) (2 lines) = 36 customers
From noon to 6.p.m. = (6 customers/hr) (6 hours) (4 lines) = 144 customers
From 6 p.m. to 9 p.m. = (6 customers/hr) (3 hours) (2 lines) = 36 customers
From 9 p.m. to midnight = (6 customers/hr) (3 hours) (1 line) = 18 customers
Sunday total regular line capacity = 18 + 36 + 144 + 36 + 18 = 252 customers
Overall Sunday capacity = Total regular line capacity + Express line capacity
Therefore overall capacity for Sundays = 360 + 252 = 612 customers
b. Reduction in express line capacity = (4 hours) (20 customers / hour) = 80 customers
Reduction in regular line capacity = (2 hours) (6 customers per hour) = 12 customers
Revised Sunday capacity = 612 (80 + 12) = 520 customers
5-21
Education.
Solution to Problem 3 Manufacturing Example

In general, we can express the equation for number of resources using the following notation:
k
pD i i
NR i 1
(T )( E )
where:
NR = Number of resources (machines or workers) required
k = number of products produced
T = Total time available per resource per scheduled time period i
pi = Unit production time for product i
Di = Demand for product i for the scheduled time period
E = Efficiency of the resource measured as a percentage
Therefore, if we know the number of workers and want to determine the maximum demand that can be
satisfied for a given product, we can manipulate the formula given above and obtain the following
equation:
( N R )(T )(E )
Di
pi
Given the above information, we can now solve Problem 3.
T (2 shifts )(6 days )(8 hrs. / shift )(60 min. / hr.) 5,760 min . / week
k
a. pD i i
(6 min.)(5,000) (8 min.)(2,500)
NW i 1
10.85 11 workers
(T )( E ) (5,760)(.80)
k
pD
i 1
i i
(6 min.)(5,000) (8 min.)(2,500)
b. NM 9.14 10 machines
(T )(E ) (5,760)(.95)
( N M )(T )( E ) (15)(5,760)(.95)
Dvideotape 13,680 videotapes
pvideotape 6
c.
( N M )(T )( E ) (15)(5,760)(.95)
DDVD 10,260 DVDs
pDVD 8
( N M )(T )(E ) (20)(5,760)(.80)
Dvideotape 15,360 videotapes
pvideotape 6
d.
( N M )(T )( E ) (20)(5,760)(.80)
DDVD 11,520 DVDs
pDVD 8
5-22
Education.
Solution to Problem 4 Manufacturing Example with Multiple Products and Multiple Machines
a. First, we need to convert the demand to machine hours for each machine in each season.
The demand in the winter is 100, 50, and 120 for components A, B and C respectively and it takes
.25 hours, .5 hours, and .4 hours to process components A, B and C respectively on machine 1.
Therefore with this information, we can compute the maximum machine hours demanded for
machine 1 (M1) in the winter quarter.
Max. hrs. for M1 in Winter = (.25)(8000)+(.5)(4,000)+(.4)(9600) = 7,840 hrs.
Similarly the quarterly machine hours demanded can be calculated for the rest of the machine-
season combinations:
Max. hrs. for M1 in Spring = (.25)(20,000)+(.5)(12,000)+(.4)(19,200) =18,680 hrs.

Max. hrs. for M1 in Summer = (.25)(12,000)+(.5)(8,000)+(.4)(14,400) = 12,760 hrs.
Max. hrs. for M1 in Fall = (.25)(6,400)+(.5)(5,600)+(.4)(7,200) = 7,280 hrs.
Max. hrs. for M2 in Winter = (.10)(8,000)+(.30)(4,000)+(.15)(9,600) = 3,440 hrs.

Max. hrs. for M2 in Spring = (.10)(20,000)+(.30)(12,000)+(.15)(19,200) = 8,480 hrs.
Max. hrs. for M3 in Winter = (.45)(8,000)+(.2)(4,000)+(.35)(9,600) = 7,760 hrs.

Max. hrs. for M3 in Spring = (.45)(20,000)+(.2)(12,000)+(.35)(19,200) = 18,120 hrs.
5-23
Education.
b. Because (T) (E) = 600 productive hours per quarter,

7,840 hrs. demanded
N M 1( Winter) 13.07 ~ 14 machine 1s
600 hrs.
Therefore we can conclude that at most we need to allocate 14 machine 1s to produce
components A, B and C in the winter quarter.
Similarly the maximum number of machine 3s needed in the spring quarter to make all three
components can be determined as follows:
18,120 hrs. demanded
N M 3(Spring) 30.20 ~ 31 machine 3s
600 hrs.
The following table summarizes the maximum number of each machine type needed by quarter.
Quarterly Maximum number of machine types needed

Season
Machine Winter Spring Summer Fall
1 14* 32 22 13
2 6 15 10 6
3 13 31 21 11
*All values in the table are rounded up.

c. Yes, there appears to be a significant seasonal variation in demand. It appears that the highest
demand is experienced in the spring followed by summer. Therefore, most likely the components
are used in summer products and because of lead times, the demand peaks in the spring.
5-24
Education.

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Chapter 05 - Strategic Capacity Planning for Products and Services

e. $100,000 TR = $90,000 @ Q = 100,000 units

c. PA = 12,000($15 $10) $40,000 = $20,000 [A is higher]

Specified profit FC $15,000 $25,000

6. a. Cost for Plan A: $20 + $.45(120) + $.20(40) = $82

c. Considering only daytime cost functions:

Comparing Plan A to Plan C over the range 1 200 minutes:

Plan A is optimal for 0 to less than 177.78 daytime minutes.

Comparing Plan A to Plan C over the range > 200 minutes:

Conclusion: Plan A is preferred from 0 to less than 177.78 daytime minutes.

Setting these equal and solving for D:

a. TC for 10,000 units TC for 20,000 units

First, we analyze the range of 1 - 1,000 units:

Total Cost Functions (when purchasing 1,001 units or more):

Set the two cost functions equal and solve for Q:

Annual capacity per cell = 225 units/day x 240 days/year = 54,000

Annual Process Time per Process Time per

Processing Requirements using Machine Type 1:

Using Machine Type 2:

Processing Requirements using Machine Type 2:

Purchase Cost for Machine Type 1 = 2 machines x $10,000/machine = $20,000

Purchase Cost for Machine Type 2 = 2 machines x $14,000/machine = $28,000

Total processing time by machine

b. Given: Operating Costs: A = $10/hour/machine; B = $11/hour/machine; C =

Conclusion: Buy 2 Bsthese have the lowest total cost.

b. Given: Estimated demand = 90 to 120 customers per day

Determine the break-even for each option:

Option 1 Process Capacity:

Option 2 Process Capacity:

Option 3 Process Capacity:

a. Capacity of the system:

Capacity of Upper Line = 15/hr.

Conclusion: Capacity of the system = 20/hr.

b. Given: The capacity of one operation could be increased.

Capacity of Upper Line = 17/hr.

Conclusion: Capacity of the system = 50/hr.

a. Capacity of Upper Line = 10/hr.

Conclusion: Capacity of the system = 15/hr.

b. Increasing Capacity of One Operation:

Conclusion: Total time to recoup initial cost = 2 + 3.6 = 5.6 years.

Case: Outsourcing of Hospital Services

Enrichment Module: Solving Capacity Planning Problems

Problem 1 Manufacturing Example

Problem 2 Service Example

Problem 3 Manufacturing Example

Problem 4 Manufacturing Example with Multiple Products and Multiple Machines

Solution to Problem 1 Manufacturing Example

Average inventory = 18,000 / 4 = 4,500 units.

Average inventory = 12,000/4 = 3,000 units.

Solution to Problem 2 Service Example

Solution to Problem 3 Manufacturing Example

Max. hrs. for M1 in Spring = (.25)(20,000)+(.5)(12,000)+(.4)(19,200) =18,680 hrs.

Max. hrs. for M2 in Winter = (.10)(8,000)+(.30)(4,000)+(.15)(9,600) = 3,440 hrs.

Max. hrs. for M3 in Winter = (.45)(8,000)+(.2)(4,000)+(.35)(9,600) = 7,760 hrs.

b. Because (T) (E) = 600 productive hours per quarter,

Quarterly Maximum number of machine types needed

*All values in the table are rounded up.

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