Professional Documents
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Capacity
Planning
Capacity Planning
• Capacity is the upper limit or ceiling
on the load that an operating unit can
handle.
• The basic questions in capacity
handling are:
– What kind of capacity is needed?
– How much is needed?
– When is it needed?
Importance of Capacity Decisions
• Impacts ability to meet future demands
• Affects operating costs
• Major determinant of initial costs
• Involves long-term commitment
• Affects competitiveness
• Affects ease of management
Capacity
• Design capacity
– maximum obtainable output
• Effective capacity
– Maximum capacity given product mix,
scheduling difficulties, and other doses of
reality.
• Actual output
– rate of output actually achieved--cannot
exceed effective capacity.
Efficiency and Utilization
Actual output
Efficiency =
Effective capacity
Actual output
Utilization =
Design capacity
Efficiency/Utilization Example
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day
Volume
Growth Decline
0 Time 0 Time
Cyclical Stable
Volume
Volume
0 0
Time Time
Developing Capacity Alternatives
• Design flexibility into systems
• Take a “big picture” approach to capacity
changes
• Prepare to deal with capacity “chunks”
• Attempt to smooth out capacity
requirements
• Identify the optimal operating level
Evaluating Alternatives
Figure 5-3
Production units have an optimal rate of output for minimal cost.
Average cost per unit
Minimum
cost
0 Rate of output
Evaluating Alternatives
Figure 5-4
Minimum cost & optimal operating rate are
functions of size of production unit.
Average cost per unit
Small
plant Medium
plant Large
plant
0 Output rate
Planning Service Capacity
# 1 4 0 0 5 . 0 2 , 0 0
# 2 3 0 0 8 . 0 2 , 4 0
# 3 7 0 0 2 . 0 1 , 4 0
5 , 8 0
Cost-Volume Relationships
Figure 5-5a
F C
+
Amount ($)
VC C)
st
= t (V
s
co co
t al l e
o i a b
T ar
l v
t a
To
Fixed cost (FC)
0
Q (volume in units)
Cost-Volume Relationships
Figure 5-5b
ue
en
Amount ($)
rev
tal
To
0
Q (volume in units)
Cost-Volume Relationships
Figure 5-5c
u e
e n f i t
Amount ($)
ev ro
r P
al t
t o s
To t a l c
To
0 BEP units
Q (volume in units)
Break-Even Problem with Step
Fixed Costs
Figure 5-6a
C =
+ V
FC
TC
= TC
V C
+
FC 3 machines
T C
C =
V
C + 2 machines
F
1 machine
Quantity
Step fixed costs and variable costs.
Break-Even Problem with Step
Fixed Costs
Figure 5-6b
$
BE
P 3
TC
BEP2
TC
3
TC
2
TR 1
Quantity
Multiple break-even points
Assumptions of Cost-Volume
Analysis
• One product is involved
• Everything produced can be sold
• Variable cost per unit is the same
regardless of volume
• Fixed costs do not change with volume
• Revenue per unit constant with volume
• Revenue per unit exceeds variable cost
per unit
Financial Analysis