Professional Documents
Culture Documents
Multiple Choice
Ans: e
Section Ref: Capacity Planning
Level: moderate
2. One reason capacity and location decisions are usually made simultaneously is what?
a) in order to get them in the operating budget on a consistent basis
b) it makes it easier to understand capacity
c) often there is not enough time available to separate them
d) they require the same types of information
e) the size of a new facility may affect its location
Ans: e
Section Ref: Capacity Planning
Level: moderate
Ans: c
Section Ref: Capacity Planning
Level: easy
Ans: a
Section Ref: Capacity Planning
Level: moderate
Ans: a
Section Ref: Capacity Planning
Level: moderate
Ans: d
Section Ref: Capacity Planning
Level: moderate
7. Investments in building or purchasing long-term production facilities are inherently risky due
to __________.
a) uncertainty in forecasting future demands
b) unexpected changes in interest rates
c) durability of materials
d) corporate mergers
e) rapid technology changes
Ans: a
Section Ref: Capacity Planning
Level: hard
8. Capacity planning is difficult because
a) Board of directors set the requirements
b) the mathematical requirements are difficult
c) the planning stages always require global considerations
d) there is no one way to measure it
e) it is easy to confuse the service organization and manufacturing organization measurements
Ans: d
Section Ref: Capacity Planning
Level: moderate
Ans: a
Section Ref: Capacity Planning
Level: easy
Ans: b
Section Ref: Capacity Planning
Level: moderate
Ans: d
Section Ref: Capacity Planning
Level: moderate
12. Input measures of capacity work better when a company produces
_____________________________.
a) discrete items
b) a single product
c) liquids
d) many different products
e) off-the-shelf items
Ans: d
Section Ref: Capacity Planning
Level: moderate
13. When discussing the capacity of a facility, we need what two types of information?
a) the amount of available capacity and the productivity of workers
b) the speed of the machines and the availability of labor
c) the amount of available capacity and the effectiveness of capacity use
d) the investment in equipment and the availability of labor
e) the investment in equipment and the number of workers
Ans: c
Section Ref: Capacity Planning
Level: moderate
Ans: b
Section Ref: Capacity Planning
Level: moderate
15. Which of the following does not contribute to the sustainability of design capacity?
a) scheduled machine maintenance
b) overtime
c) overstaffing
d) using equipment to the maximum
e) subcontracting
Ans: a
Section Ref: Capacity Planning
Level: moderate
16. The maximum output rate that can be achieved by a facility under ideal conditions is
_________________.
a) utilization
b) design capacity
c) effective capacity
d) ultimate capacity
e) temporary capacity
Ans: b
Section Ref: Capacity Planning
Level: moderate
17. The maximum output rate that can be sustained under normal conditions is
_______________________.
a) utilization
b) design capacity
c) effective capacity
d) ultimate capacity
e) temporary capacity
Ans: c
Section Ref: Capacity Planning
Level: moderate
Ans: d
Section Ref: Capacity Planning
Level: easy
19. capacity can serve to intimidate and preempt competitors from entering the
market.
a) Design
b) Flexible
c) Extra
d) Effective
e) Focused
Ans: c
Section Ref: Capacity Planning
Level: hard
20. The best operating level is the volume of output that results in the
_________________________.
a) lowest average unit cost
b) most revenue
c) maximum use of machinery
d) best quality
e) optimum product mix
Ans: a
Section Ref: Capacity Planning
Level: moderate
21. Operating a facility close to its best operating level is clearly important because
a) it reduces fixed cost
b) it reduces overtime requirements
c) of impact on costs
d) of impact on employees bonuses
e) it increases production
Ans: c
Section Ref: Capacity Planning
Level: moderate
22. The cost per unit is $36.74 at the best operating level. When the output is higher, the unit
cost will be what?
a) lower
b) the same
c) higher
d) could be higher or lower
e) could be higher, lower or the same
Ans: c
Section Ref: Capacity Planning
Level: moderate
23. Economies of scale occur when a company is operating
_________________________________________.
a) at its best operating level and increases its output
b) at its best operating level and decreases its output
c) below its best operating level and decreases its output
d) above its best operating level and increases its output
e) below its best operating level and increases its output
Ans: e
Section Ref: Capacity Planning
Level: moderate
Ans: d
Section Ref: Capacity Planning
Level: moderate
25. Management has decided to add capacity incrementally in smaller chunks as needed, rather
than purchasing one large facility. This decision ___________________________________.
a) is very risky
b) will result in low initial costs
c) will ultimately result in lower costs per unit if demand increases rapidly
d) positions the company to be well prepared for high demand in the future
e) can lead to a large amount of excess capacity
Ans: b
Section Ref: Capacity Planning
Level: hard
26. Last month TMJG Co. started producing a new product called thingamajigs from its new
plant. Sales were quite good for the first couple of weeks. Unfortunately, a technological
innovation was then announced by a competitor. This innovation will almost completely
eliminate the demand for thingamajigs. As a result, TMJG has decided to shut down and
dismantle the plant next week. The average cost per unit will be highest if the plant was
_______________________________________.
a) a small facility
b) in the right location
c) a large facility
d) just-in-time
e) a medium facility
Ans: c
Section Ref: Capacity Planning
Level: hard
Ans: b
Section Ref: Capacity Planning
Level: moderate
Ans: e
Section Ref: Capacity Planning
Level: moderate
29. facilities may not be the best approach in today’s business environment that
has short product and technological life cycles and in which flexibility is more important than
ever before.
a) Large
b) Small
c) Leased
d) Self-operating
e) Agile
Ans: a
Section Ref: Capacity Planning
Level: easy
30. Large facilities can benefit from the concept of by creating a plant within a
plant (PWP).
a) just-in-time
b) focused factories
c) economies of scale
d) supply chain
e) hierarchical management
Ans: b
Section Ref: Capacity Planning
Level: hard
Ans: c
Section Ref: Capacity Planning
Level: hard
32. In the 1980s retail sales were dominated by large department stores. However, in the 1990s
gains in sales were made by specialty stores because
______________________________________________________.
a) the large department stores started moving out of shopping malls, and their new locations
were not nearly as effective
b) customers got tired of trying to find sales clerks who would help them in the large department
stores
c) the specialty stores always had donuts and coffee for their customers
d) consumer preferences change very rapidly, and the specialty stores can focus on a
specific set of customers and respond to their unique needs
e) parking is more readily available at the specialty stores
Ans: d
Section Ref: Capacity Planning
Level: hard
Ans: d
Section Ref: Capacity Planning
Level: hard
34. can perform a number of tasks to help a company focus on its core
capabilities.
a) A plant within a plant
b) Agile manufacturing
c) Total quality management
d) Just-in-time
e) Subcontractor networks
Ans: e
Section Ref: Capacity Planning
Level: hard
Ans: c
Section Ref: Making Capacity Planning Decisions
Level: moderate
Ans: d
Section Ref: Making Capacity Planning Decisions
Level: moderate
37. Capacity cushions can be helpful if _____________________________________________.
a) demand is greater than expected
b) sales need to be buffered from production
c) total quality management fails
d) productivity is too high
e) there is excess capacity
Ans: a
Section Ref: Making Capacity Planning Decisions
Level: hard
Ans: e
Section Ref: Decision Trees
Level: hard
39. Which of the following information items is not contained in decision trees?
a) points in time when decisions are made
b) probability of choosing decision alternatives
c) chance event probabilities
d) decision alternatives
e) outcomes, such as estimated profits
Ans: b
Section Ref: Decision Trees
Level: hard
40. Decision trees are useful when the alternatives are _____ and involve _____
a) local, senior management
b) in parallel, certainty
c) in sequence, uncertainty
d) in sequence, certainty
e) in parallel, certainty
Ans: c
Section Ref: Decision Trees
Level: hard
Ans: c
Section Ref: Decision Trees
Level: hard
Ans: d
Section Ref: Decision Trees
Level: hard
43. Which of the following has the least to do with location analysis?
a) sources of transportation
b) reduction in trade barriers
c) information technology reducing need for proximity
d) retail stores locating near each other
e) automation of factories
Ans: e
Section Ref: Location Analysis
Level: moderate
44. Service organizations such as restaurants, movie theaters, and banks focus on locating near
____________.
a) suppliers
b) roads
c) intersections
d) their customers
e) potential workers
Ans: d
Section Ref: Location Analysis
Level: easy
Ans: e
Section Ref: Location Analysis
Level: moderate
Ans: a
Section Ref: Location Analysis
Level: moderate
47. A facility location factor that is important for both service and manufacturing organizations
is locating close to _________________________________.
a) labor supply
b) sources of transportation
c) suppliers
d) warehouses
e) natural resources
Ans: a
Section Ref: Location Analysis
Level: hard
48. Locating close to customers is least important for __________________________.
a) bakeries
b) movie theaters
c) flower shops
d) diamond mines
e) gas stations
Ans: d
Section Ref: Location Analysis
Level: easy
49. It takes many pounds of milk to make one pound of cheese. Therefore, there are many
cheese factories in dairy states because _________________________________.
a) of reputation
b) “cheeseheads” eat a lot of cheese
c) of transportation costs
d) making cheese is a batch process
e) customers prefer domestic cheese
Ans: c
Section Ref: Location Analysis
Level: hard
50. Local wage rates, presence of local unions, and attitudes of local workers would be major
factors for location decision for businesses that ______________________________________.
a) are labor intensive
b) have perishable products
c) have high transportation costs
d) have need for specific raw materials
e) provide in-home services
Ans: a
Section Ref: Location Analysis
Level: easy
51. In facility location zoning restrictions, soil conditions, and access roads for trucks are
________________.
a) community considerations
b) site considerations
c) quality of life issues
d) hardly ever important
e) cultural considerations
Ans: b
Section Ref: Location Analysis
Level: moderate
Ans: e
Section Ref: Location Analysis
Level: easy
53. With respect to globalization, which of the following would not be considered an important
location consideration?
a) vertical integration
b) trade barriers
c) culture
d) language barriers
e) foreign markets
Ans: a
Section Ref: Location Analysis
Level: moderate
Ans: e
Section Ref: Location Analysis
Level: moderate
55. Issues that need to be considered in location globally include all of the following except
______________.
a) different cultures
b) FEC accounting requirements
c) language barriers
d) different laws
e) different business practices
Ans: b
Section Ref: Location Analysis
Level: moderate
56. The least likely reason for a U.S. firm to choose to locate a factory in a foreign country is
_____________.
a) climate
b) natural resources
c) markets
d) cheaper suppliers
e) lower labor costs
Ans: a
Section Ref: Location Analysis
Level: moderate
57. The first step managers need to take when making facility location decisions is
_____________________.
a) begin negotiations with governments for several potential locations
b) identify specific location possibilities
c) gather information on location alternatives
d) evaluate specific sites
e) identify the location factors that are dominant for the business
Ans: e
Section Ref: Making Location Decisions
Level: moderate
Ans: c
Section Ref: Making Location Decisions
Level: moderate
59. An excellent procedure that can be used with location factors that are qualitative is
__________________.
a) the transportation method
b) break-even analysis
c) the factor rating method
d) the center of gravity approach
e) the load-distance method
Ans: c
Section Ref: Making Location Decisions
Level: moderate
60. The first step in the factor rating method for evaluating location alternatives is what?
a) select a scale by which to evaluate each alternative relative to each factor
b) evaluate each alternative relative to each factor
c) select the alternative with the highest score
d) identify dominant factors
e) assign weights to factors reflecting the importance of each factor relative to the other factors
Ans: d
Section Ref: Making Location Decisions
Level: moderate
61. A location analysis has been narrowed down to two locations, A and B. The main factors in
the decision will be supply of raw materials, which has a weight of 50, and labor cost, which has
a weight of 50. The ratings for raw materials and labor are: for A, 3 and 4, respectively; for B, 5
and 3, respectively. Using the factor rating method, the manager should
_________________________________________.
a) be indifferent between these locations
b) choose location A
c) choose location B
d) reject both locations
e) determine the capacity before deciding
Ans: c
Section Ref: Making Location Decisions
Level: moderate
62. The load-distance model frequently utilizes distance, which is the shortest
distance between two points using only north-south and east-west movements.
a) curvilinear
b) Euclidean
c) rectilinear
d) direct
e) vertical
Ans: c
Section Ref: Making Location Decisions
Level: hard
Ans: a
Section Ref: Making Location Decisions
Level: moderate
Ans: d
Section Ref: Making Location Decisions
Level: moderate
Ans: c
Section Ref: Making Location Decisions
Level: easy
66. Which of the following is not a valid assumption of the break-even model?
a) only one product is involved
b) everything which is produced will be sold
c) the revenue per unit will be the same regardless of volume
d) the fixed cost per unit will be the same regardless of volume
e) the variable cost per unit will be the same regardless of volume
Ans: d
Section Ref: Making Location Decisions
Level: hard
67. For fixed costs of $10,000, revenue per unit of $20, and variable cost per unit of $10, the
break-even quantity is ______________________.
a) 10
b) 500
c) 1,000
d) 2,000
e) 10,000
Ans: c
Section Ref: Making Location Decisions
Level: moderate
Ans: b
Section Ref: Making Location Decisions
Level: easy
69. For a break-even graph, the total cost for each possible location is plotted against
__________________.
a) fixed costs
b) variable costs
c) profit margin
d) quantity
e) price
Ans: d
Section Ref: Making Location Decisions
Level: moderate
70. To plot the break-even line one end of the line is the y-intercept point. The other line point
a) requires the center of gravity calculation
b) is established by the finance department
c) is arbitrary but usually the expected volume
d) is not arbitrary
e) is derived from the location analysis
Ans: c
Section Ref: Making Location Decisions
Level: easy
71. The method which relies on a specific algorithm to evaluate the cost impact of adding
potential location sites to the network of existing facilities is
__________________________________________.
a) cost-volume analysis
b) the transportation method
c) factor rating analysis
d) linear regression analysis
e) the load-distance model
Ans: b
Section Ref: Making Location Decisions
Level: moderate
72. Capacity planning and location analysis are decisions that must be made by
_______________ working together.
a) accounting, marketing and operations
b) marketing and finance
c) finance, marketing and operations
d) accounting, marketing and finance
e) marketing and operations
Ans: c
Section Ref: Capacity Planning and Facility Location Across the Organization
Level: hard
Ans: b
Section Ref: Capacity Planning
Level: hard
Ans: c
Section Ref: Decision Trees
Level: hard
True/False
Ans: False
Section Ref: Capacity Planning
Level: moderate
Ans: True
Section Ref: Capacity Planning
Level: moderate
3. Capacity planning is complicated by the fact that capacity is usually purchased in chunks,
rather than smooth increments.
Ans: True
Section Ref: Capacity Planning
Level: moderate
4. An example of an output measure of capacity is labor hours.
Ans: False
Section Ref: Capacity Planning
Level: easy
5. Input measures of capacity work better when a company produces a single product.
Ans: False
Section Ref: Capacity Planning
Level: moderate
Ans: True
Section Ref: Capacity Planning
Level: hard
7. The maximum output rate that can be achieved by a facility under ideal conditions is design
capacity.
Ans: True
Section Ref: Capacity Planning
Level: moderate
8. Under ideal conditions the firm can achieve 125% of design capacity on a daily basis.
Ans: False
Section Ref: Capacity Planning
Level: moderate
Ans: True
Section Ref: Capacity Planning
Level: easy
10. Extra capacity can serve to intimidate and preempt competitors from entering the market.
Ans: True
Section Ref: Capacity Planning
Level: hard
11. The best operating level is the volume of output that results in the lowest average unit cost.
Ans: True
Section Ref: Capacity Planning
Level: moderate
12. A focused factory is one that produces many products with options.
Ans: False
Section Ref: Capacity Planning
Level: hard
13. Focused factories are a factor which contributes to the success of JIT.
Ans: True
Section Ref: Capacity Planning
Level: moderate
14. A plant within a plant can perform a number of tasks to help a company focus on its core
capabilities.
Ans: False
Section Ref: Capacity Planning
Level: hard
15. Capacity cushions can be helpful if sales need to be buffered from production.
Ans: False
Section Ref: Making Capacity Planning Decisions
Level: hard
16. Long-term capacity requirements are identified on the basis of forecasts of future labor
market supplies.
Ans: False
Section Ref: Making Capacity Planning Decisions
Level: hard
17. Solving a decision tree that involves maximizing profit includes selecting the decision
alternative with the highest expected value.
Ans: True
Section Ref: Decision Trees
Level: hard
18. The cost of space in Silicon Valley is higher now than it was in the late 1990s.
Ans: False
Section Ref: Location Analysis
Level: moderate
19. In facility location zoning restrictions, soil conditions, and access roads for trucks are quality
of life issues.
Ans: False
Section Ref: Location Analysis
Level: moderate
20. Disadvantages of globalization include political risks for countries with unstable
governments.
Ans: True
Section Ref: Location Analysis
Level: moderate
21. An excellent procedure that can be used with location factors that are qualitative is the factor
rating method.
Ans: True
Section Ref: Making Location Decisions
Level: moderate
22. The load-distance model frequently utilizes rectilinear distance, which is the shortest
distance between two points using only north-south and east-west movements.
Ans: True
Section Ref: Making Location Decisions
Level: moderate
23. The center of gravity approach requires precise XY grid coordinates to develop a valid
location.
Ans: False
Section Ref: Making Location Decisions
Level: moderate
24. In choosing a location, the transportation method provides an easy way to calculate X and Y
coordinates for a good starting point.
Ans: False
Section Ref: Making Location Decisions
Level: moderate
Ans: True
Section Ref: Making Location Decisions
Level: easy
Essay
1. Describe some factors that contribute to the capacity of an emergency room, as measured by
the number of patients served per day.
Ans: One factor is the number of beds in the ER and the amount of space available. If there
are not enough beds, patients may have to wait long periods of time to be examined. Too
many empty beds, on the other hand, would be a waste of space. Another factor is the
number of nurses and doctors working on a shift. If not enough staff is available, patients
may not have anyone to treat them. The consequences of not having enough capacity could
be grave. However, scheduling more staff than needed would result in excess capacity in
the form of highly paid professionals not having work to do.
Section Ref: Capacity Planning
Level: moderate
Ans: realistic work schedules and breaks, regular staff levels, scheduled machine maintenance,
and none of the temporary measures that are used to achieve design capacity
Section Ref: Capacity Planning
Level: hard
3. Why would a company consider purchasing or building a small facility, when in the long run
they think that they could use a large one?
4. Two sizes are being considered for a new facility, medium and large. Discuss best operating
level in this context.
Ans: The best operating level will vary with size of the facility. The average cost per unit will be
lowest at the best operating level for the large facility.
Section Ref: Capacity Planning
Level: hard
5. Why are focused factories often the best approach in today’s business environment?
Ans: due to short product and technology life cycles, and the importance of flexibility
Section Ref: Capacity Planning
Level: moderate
Ans: 1) forecast overall long-range market demand, 2) then estimate the company’s market
share as a percentage of the total
Section Ref: Making Capacity Planning Decisions
Level: hard
7. There they go again. There is another Burger King being built right next to a McDonald’s at
an Interstate Highway exit. Why does this approach make sense?
Ans: Customers will be drawn to that location by the availability of fast food restaurants.
Section Ref: Location Analysis
Level: moderate
8. Why does it make sense that there are many cheese factories that are staying in Wisconsin,
while many clothing manufacturers have been shutting down domestic plants and locating
outside of the US?
Ans: Cheese is made from milk, and cheese factories are located near dairy farms to avoid the
cost of transporting the heavy milk long distances. The major cost in making clothes is
labor, and labor costs tend to be high in the U.S.
Section Ref: Location Analysis
Level: hard
9. Give an example of a type of facility for which quality-of-life issues would be of primary
importance.
Ans: several possibilities, such as research and development facilities, corporate offices,
universities, etc.
Section Ref: Location Analysis
Level: moderate
Ans: political risks in countries with unstable governments, need to share proprietary
technology, bad attitudes on the part of workers, lower worker productivity and skills, poor
roads, lack of utilities and other infrastructure problems
Section Ref: Location Analysis
Level: moderate
Ans: Marketing is the function that has information to future demands and competition. Each of
these are critical for future capacity planning.
Section Ref: Capacity Planning and Facility Location Across the Organization
Level: easy
12. Describe the relation of capacity requirement and the supply chain.
Ans: The supply chain is a pipeline that supplies a certain level of customer demand. This can
only happen if the supply chain capacity meets the demand requirements and is matched across
the full supply chain.
Section Ref: The Supply Chain Link
Level: moderate
Short Answer
1. While long term capacity decisions are strategic and capital intense, short term capacity
decisions involve ________________________
2. Capacity planning problems are notorious in ER and other organizations who experience ____
______ in ____.
6. Name three of the main factors that affect location decisions. ________________________,
________________________, and ________________________.
Ans: Three of: proximity to suppliers, proximity to customers, proximity to qualified labor,
community, site, quality of life.
Section Ref: Location Analysis
Difficulty: moderate
7. Schools, colleges, and universities consider the size of the classrooms carefully because
________________________
9. A firm must choose between remaining where it is, with current capacity, and building a new
facility with 50% more capacity. The probability of high demand is estimated to be 75%. The
current facility would provide $100,000 profit if there is high demand or $50,000 profit if there
is low demand. The replacement facility would provide $160,000,000 profit if there is high
demand but would only break even if there is low demand. What is the expected value of each
option?________________________
Ans: For the replacement facility, .75*$160,000 + .25*0 = $120,000. For the current facility,
.75*100,000 + .25*$50,000 = $87,500.
Section Ref: Making Capacity Planning Decisions
Difficulty: hard
10. What is the load-distance score formula? ________________________
Ans: (formula) ld = sum l_ij times d_ij where l_ij is the weight carried from point i to j and d_ij
is the distance from i to j.
Section Ref: Location Analysis
Difficulty: hard
11. An area that has further encouraged globalization is the growth of __________.
12. A firm that wishes to use break-even analysis to evaluate potential locations must know
________________________ for each site.
13. Factor rating can be used to evaluate multiple _____ based on a number of ____ ____.
Problems
1. A clinic has been set up to give flu shots to the elderly in a large city. The design capacity is
50 seniors per hour, and the effective capacity is 44 seniors per hour. Yesterday the clinic was
open for ten hours and gave flu shots to 330 seniors.
(a) What is the design utilization?
(b) What is the effective utilization?
2. Magnatree is a large company that has been working on a new product. This product has
tremendous potential, but Magnatree must move quickly. They have decided that they will
introduce the product in two months and have already started developing their advertising
campaign.
They are sure that the product will be a success, with a possibility that it will be a huge success.
They recently found out that another company, Shadycorp, has some unique expertise that could
significantly improve the new product. They contacted them and Shadycorp offered to sell their
expertise to Magnatree for $5 million. Magnatree needs to make an immediate decision on
Shadycorp’s offer or it will be too late to investigate the use of the expertise in design of the new
product. Without the expertise Magnatree has a 20% chance of making the new product a huge
success. With Shadycorp’s expertise there will be a 40% chance of the new product being a huge
success.
If the new product is a huge success, the net present value of its future profits is expected to be
$50 million. If it is merely a success, the net present value of its future profits is expected to be
$20 million.
(a) Construct a decision tree and solve it.
(b) Should Magnatree accept Shadycorp’s offer?
(c) What is the expected net present value of its future profits from the new product?
3. Aacorp has experienced an increase in demand for its product and has decided that it will
expand its factory, since capacity is currently too low to meet demand. It is not sure whether
demand will continue to increase in the future or not. It is considering two options. A small
expansion will be sufficient to meet its current demand and also its future demand if demand
levels off. Its second option is a large expansion, which will be more than sufficient for current
demand and will also handle future demand even if continues to increase. They have estimated
that the probability that demand will continue to increase is 40%.
A small expansion will cost $2 million while a large expansion will cost $4 million. If they make
a small expansion and demand continues to increase, they will have to make a second expansion
in 18 months and the net present value of that second expansion is $3 million.
The net present value of the future revenue resulting from the expansion will be $5 million under
two conditions: 1) demand levels off, or 2) demand continues to increase, but Aacorp chooses a
small expansion and does not make a second expansion in 18 months. The net present value of
the future revenue will be $9 million if demand continues to increase and Aacorp either chooses
a large expansion or makes a second expansion in 18 months after choosing a small expansion.
(a) Construct a decision tree and solve it.
(b) Should Aacorp make a small expansion or a large expansion?
(c) What is the resulting expected net present value of its future profits?
4. Medco plans to open a new medical center and is looking for a suitable location. They have
narrowed their choice down to three locations, on Oak, Elm, and Ash Streets. They have defined
four factors and have assigned weights to these factors as follows: proximity to hospitals (40),
customer parking (30), appearance (20), and ease of expansion (10). They then rated the three
locations for the four factors, using a scale of one to five. Their ratings are as follows:
Location
Factor Oak Elm Ash
Proximity to hospitals 2 5 3
Customer parking 5 1 3
Appearance 4 2 5
Ease of expansion 3 4 1
(a) Calculate the scores for each location.
(b) According to the model which location should they choose?
Ans: (a) Oak - 340, Elm - 310, Ash - 320; (b) choose Oak
Section Ref: Making Location Decisions
Level: moderate
5. Supershirtco plans to open a new factory and is looking for a suitable location. They have
narrowed their choice down to three locations, Lima, Peru; Rome, Italy; and Nome, Alaska.
They have defined four factors and have assigned weights to these factors as follows: wage rates
(60), construction costs (20), logistics (10), and climate (10). They then rated the three locations
for the four factors, using a scale of one to five. Their ratings are as follows:
Location
Factor Lima Rome Nome
Wage rates 5 3 1
Construction costs 4 2 5
Logistics 3 2 5
Climate 3 5 1
(a) Calculate the scores for each location.
(b) According to the model which location should they choose?
Ans: (a) Lima - 440, Rome - 290, Nome - 220; (b) choose Lima
Section Ref: Making Location Decisions
Level: moderate
6. Aalogistics Co. has just signed a contract to deliver products to three locations, and they are
trying to decide where to put their new warehouse. The three delivery locations are Chicago,
Kansas City, and Memphis. The two potential sites for the warehouse are Peoria and St. Louis.
The x, y coordinates for the delivery locations and warehouses are as follows:
The total quantity to be delivered to each destination is: 400 to Chicago, 150 to Kansas City, and
100 to Memphis.
(a) Calculate the total load-distance value from each potential warehouse location.
(b) Where should the new warehouse be located?
Ans: (a) load-distance for Peoria - 2,850, load-distance for St. Louis - 3,150; (b) in Peoria
Section Ref: Making Location Decisions
Level: moderate
7. Wefixit Co. has just signed a contract to handle copy machine repairs for a large printing
company in Chicago. The contract covers copy machines at four locations, in the Loop
(downtown), on the North side, on the West side, and on the South side. Wefixit has identified
two potential sites for housing their equipment, spare parts, and employees. One site is
Northwest of the Loop, and the other on is south of the Loop. The x, y coordinates for the
printing company locations and potential sites for Wefixit are as follows:
The estimate number of trips per year to each Printing Co. location is: 400 to Loop, 200 to North
side, 200 to West side and 100 to South side.
(a) Calculate the total load-distance value from each potential Wefixit location.
(b) Where should Wefixit be located?
Ans: (a) load-distance for Northwest - 9,700, load-distance for South - 8,000; (b) South
Section Ref: Making Location Decisions
Level: moderate
8. Aalogistics Co. has just signed a contract to deliver products to three locations, and they are
trying to decide where to put their new warehouse. The three delivery locations are Chicago,
Kansas City, and Memphis. The x, y coordinates for the delivery locations are as follows:
The total quantity to be delivered to each destination is: 400 to Chicago, 150 to Kansas City, and
100 to Memphis. Calculate the location of the new warehouse using the Center of Gravity
approach.
9. Phil’s consulting services has grown rapidly. Phil is now traveling extensively around the
country. Phil has the liberty to live anywhere he wants but wants to decide, geographically, the
ideal location to relocate to. Phil’s primary clients and associated number of trips are:
Client A = 15 trips, coordinates (20,80)
Client B = 40 trips, coordinates (30,60)
Client C = 35 trips, coordinates (40,70)
Client D = 25 trips, coordinates (50,90)
Ans: (36.1,72.2) Xc.g.=∑liXi/∑li= (15*20 + 40*30 + 35* 40 = 25* 50) = 36.1 Yc.g.=∑liYi
/∑li = 15*80 + 40*60 + 35* 70 = 25* 90 = 72.2
Section Ref: Making Location Decisions
Level: moderate
10. Amalagamatada HOH, Inc., makes water treatment machines for homes. These machines are
referred to as AmaHOH, and Amalagamatada HOH, Inc. is trying to decide whether or not to
built a new plant in Southern California. The plant will have annual fixed costs of $2,000,000
and variable costs of $800 for each AmaHOH produced. The sales price is $1,000 for each
AmaHOH.
(a) Determine the break-even quantity.
(b) Marketing is certain that they will be able to sell much more than the break-even quantity in
part a. and have proposed building an even larger plant. This plant will have annual fixed costs
of $5,000,000 and variable costs of $700 for each AmaHOH produced. The sales price will still
be $1,000 for each AmaHOH. Determine the quantity above which the larger plant should be
built, rather than the plant in part a.
11. Acme Corp. makes vending machines for small companies. They have recently started
selling their vending machines in Southern California, with a great deal of success, at a price of
$5,000 per machine. The company is convinced that they will need to either build a new plant
near San Diego or expand their existing plant in New Orleans. If they build a new plant near San
Diego, the annual fixed costs will be $6,000,000 and the variable costs will be $3,000 for each
vending machine delivered to Southern California. If they expand the New Orleans plant, their
annual fixed costs for the expansion will be $2,000,000 and the variable costs will be $4,000 for
each vending machine delivered to Southern California.
(a) Determine the break-even quantity for building the new plant near San Diego.
(b) Determine the break-even quantity for expanding the plant in New Orleans.
(c) At what output will the two locations have the same total cost?
(d) Assume that the demand forecast is less than the output in part c. Which option should the
company choose?
Ans: (a) 3,000; (b) 2,000, (c) 4,000; (d) Expand the plant in New Orleans
Section Ref: Making Location Decisions
Level: moderate
12. Raissa’s early learning center must decide how many students they need to enroll to make a
profit. There is a trade off in quality of care and the number of students enrolled. They must
make a profit but not have so many children that the care suffers. They must establish the point
where the number of enrolled students establishes the first profit point. They’ve determined that
their fixed costs are $4,500 per month. It costs them an additional $150 per month for each
enrolled child. They only enroll students on a monthly basis at a price of $450. How many
students must they enroll to start making a profit?