Operations Management: Capacity Utilization

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Questions and Answers

What is the main purpose of segmenting larger operations into smaller operating units?

To increase subcontracting

To focus on core objectives (correct)

To reduce strategic implications

To reduce capacity requirements

What is the primary benefit of subcontractor networks?

Increase core capacity

Free up capacity for core activities (correct)

Reduce forecasting reliance on qualitative models

Reduce strategic implications

How many steps are involved in making capacity planning decisions?

3 (correct)

What is the primary purpose of forecasting in capacity planning?

To identify future demand Signup and view all the answers

What is a capacity cushion?

Planning for added capacity to provide flexibility Signup and view all the answers

What should be considered when making capacity planning decisions?

The strategic implications and industry potential for overcapacity Signup and view all the answers

What is the first step in making capacity planning decisions?

Identify capacity requirements Signup and view all the answers

What is an example of a capacity alternative?

Do nothing Signup and view all the answers

What is the variable cost per unit?

$3 per unit Signup and view all the answers

What is the fixed cost per month?

$42,000 per month Signup and view all the answers

What is the breakeven point (BEP) in units?

10,500 units Signup and view all the answers

What is the target profit?

$46,000 Signup and view all the answers

What is the price per unit?

$7 per unit Signup and view all the answers

What is the breakeven point (BEP) for one machine?

320 units Signup and view all the answers

How many machines should the manager purchase if the projected annual demand is between 580 and 660 units?

2 machines Signup and view all the answers

What is the total annual fixed cost for 3 machines?

$20,000 Signup and view all the answers

What is the utilization effective of the bakery?

140% Signup and view all the answers

What is the design capacity of the bakery?

30 Signup and view all the answers

What is the reason for economies of scale?

Bulk purchasing and handling of materials Signup and view all the answers

What is the result of diseconomies of scale?

The cost per unit of output rises Signup and view all the answers

What is the best operating level?

The output level that results in the lowest average unit cost Signup and view all the answers

What is the advantage of adding capacity incrementally in smaller chunks?

It allows for flexibility and adaptability to changes in demand Signup and view all the answers

What is the characteristic of a focused factory?

It is a small facility with limited objectives Signup and view all the answers

What is the current situation of the bakery?

It is operating slightly below its design capacity and considerably above its effective capacity Signup and view all the answers

What is the total processing time needed to fulfill the annual demand?

5,800 hours Signup and view all the answers

What is the annual capacity of one machine?

2,000 hours per machine Signup and view all the answers

What is the break-even point (BEP) in a business?

The point at which total revenue equals total costs or expenses Signup and view all the answers

How many machines are needed to handle the required volume?

3 machines Signup and view all the answers

What is the processing time per unit for Product #1?

5.0 hours per unit Signup and view all the answers

What is the primary basis for evaluating location decisions using the load-distance model and center of gravity approach?

Distance Signup and view all the answers

What is the primary purpose of break-even analysis in the context of location decisions?

To evaluate cost-based location decisions Signup and view all the answers

Which tool is used to evaluate the cost impact of adding sites to a network of current facilities?

Transportation method Signup and view all the answers

What is the common factor among the load-distance model, center of gravity approach, and transportation method?

Distance-based evaluation Signup and view all the answers

What is the primary application of break-even analysis in location decisions?

Evaluating the cost of adding new facilities Signup and view all the answers

What is the key difference between the load-distance model and break-even analysis?

One is used for evaluating distance, while the other is used for evaluating cost Signup and view all the answers

Study Notes

Capacity Planning

The bakery's current utilization is slightly below its design capacity and considerably above its effective capacity.
The bakery can only operate at this level for a short period of time.

Best Operating Level

The Best Operating Level is the output that results in the lowest average unit cost.
Economies of Scale occur when the cost per unit of output drops as the volume of output increases.
Diseconomies of Scale occur when the cost per unit rises as the volume increases.

Capacity Alternatives

When expanding capacity, there are two alternatives: purchasing one large facility or adding capacity incrementally in smaller chunks as needed.
Focused factories are small, specialized facilities with limited objectives.
Plant within a plant (PWP) involves segmenting larger operations into smaller operating units with focused objectives.
Subcontractor networks outsource non-core items to free up capacity for what you do well.

Making Capacity Planning Decisions

The three-step procedure for making capacity planning decisions is:
- Identify Capacity Requirements
- Develop Capacity Alternatives
- Evaluate Capacity Alternatives

Identifying Capacity Requirements

Forecasting capacity involves long-term capacity requirements based on future demand.
Capacity cushions plan for added capacity to provide flexibility.
Strategic implications include considering how much capacity a competitor might have and the potential for overcapacity in the industry.

Developing Capacity Alternatives

Capacity alternatives include:
- Doing nothing
- Expanding large now (may include a capacity cushion)
- Expanding small now with the option to add later

Example 1: Capacity Planning

The example involves calculating the number of machines needed to handle the required volume.
The solution involves calculating the annual capacity of a machine and then dividing the processing time needed by the capacity per machine.

Cost-Volume Relationships

To be profitable, it is important to know what your break-even point is.
The break-even point is the point at which total revenue equals total costs or expenses.
The solution involves calculating the break-even point using the formula QBEP = FC / P - V.

Example 4: Break-Even Analysis

The example involves determining the break-even point for each range of output based on the number of machines purchased.
The solution involves calculating the break-even point for each machine and then determining which machine to purchase based on the projected annual demand.

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Description

This quiz assesses your understanding of capacity utilization in operations management, including effective and design capacity. Calculate the utilization and identify the current state of capacity.