Ch7s Capacity Management – Test Bank | 10th Global Ed

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Operations Management, 10e, Global Edition (Heizer/Render)

Chapter 7 Supplement Capacity and Constraint Management

1) Utilization is the number of units a facility can hold, receive, store, or produce in a period of time.

Diff: 1

Topic: Capacity

Objective: LO7-Supplement-1

2) Design capacity is the theoretical maximum output of a system in a given period under ideal conditions.

Diff: 2

Topic: Capacity

Objective: LO7-Supplement-2

3) Capacity decisions are based on technological concerns, not demand forecasts.

Diff: 1

Topic: Capacity

Objective: LO7-Supplement-1

4) Expected output is sometimes referred to as rated capacity.

True

Diff: 2

Topic: Capacity

Objective: LO7-Supplement-2

5) Price changes are useful for matching the level of demand to the capacity of a facility.

Diff: 2

Topic: Capacity

Objective: LO7-Supplement-2

6) A useful tactic for increasing capacity is to redesign a product in order to get more throughput.

Diff: 2

Topic: Capacity

Objective: LO7-Supplement-2

7) Changes in capacity may lead, lag, or straddle the demand.

Diff: 2

Topic: Capacity

Objective: LO7-Supplement-2

8) Building an additional warehouse is an incremental expansion, not a one-step expansion.

Diff: 2

Topic: Capacity

Objective: LO7-Supplement-2

9) Fixed costs are those costs that continue even if no units are produced.

Diff: 2

Topic: Break-even analysis

Objective: LO7-Supplement-4

10) Break-even analysis identifies the volume at which fixed costs and revenue are equal.

Diff: 2

Topic: Break-even analysis

Objective: LO7-Supplement-4

11) Break-even analysis is a powerful analytical tool, but is useful only when the organization produces a single product.

Diff: 2

Topic: Break-even analysis

Objective: LO7-Supplement-4

12) Possible decision alternatives found in capacity EMV problems are future demands or market favorability.

Diff: 2

Topic: Applying EMV to capacity decisions

Objective: LO7-Supplement-5

13) One limitation of the net present value approach to investments is that investments with identical net present values may have very different cash flows.

Diff: 2

Topic: Applying investment analysis to strategy-driven investments

Objective: LO7-Supplement-6

14) The net present value of $10,000 to be received in exactly three years is considerably greater than $10,000.

Diff: 1

Topic: Applying investment analysis to strategy-driven investments

Objective: LO7-Supplement-6

15) The theory of constraints is fundamental to proper use of the assignment method of loading jobs.

False

Diff: 2

Topic: Bottleneck analysis and the TOC

Objective: LO7-Supplement-3

16) The theory of constraints is a body of knowledge that deals with anything that limits an organization's ability to meet its goals.

True

Diff: 1

Topic: Bottleneck analysis and the TOC

Objective: LO7-Supplement-3

17) Substantial research has proved that the only successful method of dealing with bottlenecks is to increase the bottleneck's capacity.

Diff: 2

Topic: Bottleneck analysis and the TOC

Objective: LO7-Supplement-3

18) What is sometimes referred to as rated capacity?

A) efficiency

B) utilization

C) effective capacity

D) expected output

E) design capacity

Diff: 2

Topic: Capacity

Objective: LO7-Supplement-2

19) Effective capacity is the

A) maximum output of a system in a given period

B) capacity a firm expects to achieve given the current operating constraints

C) average output that can be achieved under ideal conditions

D) minimum usable capacity of a particular facility

E) sum of all of the organization's inputs

Diff: 2

Topic: Capacity

Objective: LO7-Supplement-2

20) Which of the following represents an aggressive approach to demand management in the service sector when demand and capacity are not particularly well matched?

A) inexpensive rates for weekend phone calls

B) appointments

C) reservations

D) first-come, first-served

E) none of the above

Diff: 2

Topic: Capacity

Objective: LO7-Supplement-2

21) A high value for which of the following signals that an operations manager is excelling?

A) efficiency

B) utilization

C) effective Capacity

D) net present value

E) none of the above

Diff: 2

Topic: Capacity

Objective: LO7-Supplement-2

22) Utilization will always be lower than efficiency because

A) Effective capacity is less than design capacity.

B) Effective capacity is greater than design capacity.

C) Effective capacity equals design capacity.

D) False, Utilization and efficiency are equal in value.

E) False, Utilization is normally greater than efficiency.

Diff: 2

Topic: Capacity

Objective: LO7-Supplement-2

23) The Academic Computing Center has five trainers available in its computer labs to provide training sessions to students. Assume that the capacity of the system is 1900 students per semester and the utilization is 90%. If the number of students who actually got their orientation session is 1500, what is the efficiency of the system?

A) 1350 students

B) 1710 students

C) 75%

D) 87.7%

E) 90%

Diff: 2

Topic: Capacity

AACSB: Analytic Skills

Objective: LO7-Supplement-2

24) Christopher's Cranks uses a machine that can produce 100 cranks per hour. The firm operates 12 hours per day, five days per week. Due to regularly scheduled preventive maintenance, the firm expects the machine to be running during approximately 95% of the available time. Based on experience with other products, the firm expects to achieve an efficiency level for the cranks of 85%. What is the expected weekly output of cranks for this company?

A) 5100

B) 5700

C) 4845

D) 969

E) 6783

Diff: 2

Topic: Capacity

AACSB: Analytic Skills

Objective: LO7-Supplement-2

25) The staff training center at a large regional hospital provides training sessions in CPR to all employees. Assume that the capacity of this training system was designed to be 1200 employees per year. Since the training center was first put in use, the program has become more complex, so that 1050 now represents the most employees that can be trained per year. In the past year, 950 employees were trained. The efficiency of this system is approximately __________ and its utilization is approximately __________.

A) 79.2 percent; 90.5 percent

B) 90.5 percent; 79.2 percent

C) 87.5 percent; 950 employees

D) 950 employees; 1050 employees

E) 110.5 percent; 114.3 percent

Diff: 2

Topic: Capacity

AACSB: Analytic Skills

Objective: LO7-Supplement-2

26) Which of the following represents a common way to manage capacity in the service sector?

A) appointments

B) reservations

C) changes in staffing levels

D) first-come, first served service rule

E) "early bird" specials in restaurants

Diff: 1

Topic: Capacity

Objective: LO7-Supplement-2

27) If demand exceeds capacity at a new facility, an organization can use which of the following to move demand to an existing facility?

A) aggressive marketing

B) lower prices at all facilities

C) build a facility of the correct size

D) add a complementary product

E) reduce lead times

Diff: 2

Topic: Capacity

Objective: LO7-Supplement-2

28) Adding a complementary product to what is currently being produced is a demand management strategy used when

A) demand exceeds capacity

B) capacity exceeds demand for a product which has stable demand

C) the existing product has seasonal or cyclical demand

D) price increases have failed to bring about demand management

E) efficiency exceeds 100 percent

Diff: 2

Topic: Capacity

Objective: LO7-Supplement-2

29) An organization whose capacity is on that portion of the average unit cost curve that falls as output rises

A) has a facility that is below optimum operating level and should build a larger facility

B) has a facility that is above optimum operating level and should build a smaller facility

C) is suffering from diseconomies of scale

D) has utilization higher than efficiency

E) has efficiency higher than utilization

Diff: 2

Topic: Capacity

Objective: LO7-Supplement-2

30) Of the four approaches to capacity expansion, the approach that "straddles" demand

A) uses incremental expansion

B) uses one-step expansion

C) at some times leads demand, and at other times lags

D) works best when demand is not growing but is stable

E) Choices A and C are both correct.

Diff: 2

Topic: Capacity

Objective: LO7-Supplement-1

31) Which of the following is not one of the four approaches to capacity expansion?

A) average capacity with incremental expansion

B) lead demand with incremental expansion

C) lag demand with incremental expansion

D) lead demand with one-step expansion

E) lag demand with one-step expansion

Diff: 2

Topic: Capacity

Objective: LO7-Supplement-1

32) Which of the following is false regarding capacity expansion?

A) "Average" capacity sometimes leads demand, sometimes lags it.

B) If "lagging" capacity is chosen, excess demand can be met with overtime or subcontracting.

C) Total cost comparisons are a rather direct method of comparing capacity alternatives.

D) Capacity may only be added in large chunks.

E) All of the above are true.

Diff: 2

Topic: Capacity

Objective: LO7-Supplement-1

33) A tortilla chip workstation produces 1,000 chips in 20 seconds. Its process cycle time is

A) .02 second per chip

B) 50 chips per second

C) 20 seconds

D) 6000 chips per minute

E) none of the above

Diff: 2

Topic: Bottleneck analysis and the TOC

AACSB: Analytic Skills

Objective: LO7-Supplement-3

34) A work system has five stations that have process times of 5, 9, 4, 9, and 8. What is the process cycle time of the system?

A) 4

B) 9

C) 18

D) 35

E) none of the above

Diff: 2

Topic: Bottleneck analysis and the TOC

AACSB: Analytic Skills

Objective: LO7-Supplement-3

35) A work system has five stations that have process times of 5, 9, 4, 9, and 8. What is the product process cycle time?

A) 4

B) 9

C) 18

D) 35

E) none of the above

Diff: 2

Topic: Bottleneck analysis and the TOC

AACSB: Analytic Skills

Objective: LO7-Supplement-3

36) The process cycle time of a system is generally referred to as the

A) bottleneck

B) sum of all workstation times

C) shortest workstation time

D) average workstation time

E) median workstation time

Diff: 2

Topic: Bottleneck analysis and the TOC

Objective: LO7-Supplement-3

37) An assembly line has 10 stations with process times of 1, 2, 3, 4, …, 10 respectively. The process cycle time of the system is __________.

A) 18.18% of the product process cycle time

B) 100% of the product process cycle time

C) 550% of the product process cycle time

D) 50% of the product process cycle time

E) none of the above

Diff: 2

Topic: Bottleneck analysis and the TOC

AACSB: Analytic Skills

Objective: LO7-Supplement-3

38) Which of the following is not one of the four principles of bottleneck management?

A) Release work orders to the system at the bottleneck's capacity pace.

B) Lost time at the bottleneck is lost system capacity.

C) Increasing capacity at non-bottleneck stations is a mirage.

D) Increased bottleneck capacity is increased system capacity.

E) Bottlenecks should be moved to the end of the system process.

Diff: 2

Topic: Bottleneck analysis and the TOC

Objective: LO7-Supplement-3

39) TOC was popularized by

A) Goldratt and Cox

B) Ford

C) Taguchi

D) Deming

E) Motorola and GE

Diff: 2

Topic: Bottleneck analysis and the TOC

Objective: LO7-Supplement-3

40) TOC strives to reduce the effect of constraints by

A) offloading work from constrained workstations

B) increasing constrained workstation capability

C) changing workstation order to reduce process cycle time

D) A and B

E) A, B, and C

Diff: 2

Topic: Bottleneck analysis and the TOC

Objective: LO7-Supplement-3

41) Break-even is the number of units at which

A) total revenue equals price times quantity

B) total revenue equals total variable cost

C) total revenue equals total fixed cost

D) total profit equals total cost

E) total revenue equals total cost

Diff: 2

Topic: Break-even analysis

Objective: LO7-Supplement-4

42) Which of the following statements regarding fixed costs is true?

A) Fixed costs rise by a constant amount for every added unit of volume.

B) While fixed costs are ordinarily constant with respect to volume, they can "step" upward if volume increases result in additional fixed costs.

C) Fixed costs are those costs associated with direct labor and materials.

D) Fixed costs equal variable costs at the break-even point.

E) Fixed cost is the difference between selling price and variable cost.

Diff: 2

Topic: Break-even analysis

Objective: LO7-Supplement-4

43) Which of the following costs would be incurred even if no units were produced?

A) raw material costs

B) direct labor costs

C) transportation costs

D) building rental costs

E) purchasing costs

Diff: 2

Topic: Break-even analysis

Objective: LO7-Supplement-4

44) Basic break-even analysis typically assumes that

A) revenues increase in direct proportion to the volume of production, while costs increase at a decreasing rate as production volume increases

B) variable costs and revenues increase in direct proportion to the volume of production

C) both costs and revenues are made up of fixed and variable portions

D) costs increase in direct proportion to the volume of production, while revenues increase at a decreasing rate as production volume increases because of the need to give quantity discounts

E) All of the above are assumptions in the basic break-even model.

Diff: 3

Topic: Break-even analysis

Objective: LO7-Supplement-4

45) Fabricators, Inc. wants to increase capacity by adding a new machine. The fixed costs for machine A are $90,000, and its variable cost is $15 per unit. The revenue is $21 per unit. The break-even point for machine A is

A) $90,000 dollars

B) 90,000 units

C) $15,000 dollars

D) 15,000 units

E) cannot be calculated from the information provided

Diff: 2

Topic: Break-even analysis

AACSB: Analytic Skills

Objective: LO7-Supplement-4

46) A fabrication company wants to increase capacity by adding a new machine. The firm is considering proposals from vendor A and vendor B. The fixed costs for machine A are $90,000 and for machine B, $75,000. The variable cost for A is $15.00 per unit and for B, $18.00. The revenue generated by the units processed on these machines is $21 per unit. If the estimated output is 5000 units, which machine should be purchased?

A) machine A

B) machine B

C) either machine A or machine B

D) no purchase because neither machine yields a profit at that volume

E) purchase both machines since they are both profitable

Diff: 2

Topic: Break-even analysis

AACSB: Analytic Skills

Objective: LO7-Supplement-4

47) Fred's Fabrication, Inc. wants to increase capacity by adding a new machine. The firm is considering proposals from vendor A and vendor B. The fixed costs for machine A are $90,000 and for machine B, $70,000. The variable cost for A is $9.00 per unit and for B, $14.00. The revenue generated by the units processed on these machines is $20 per unit. The crossover between machine A and machine B is

A) 4,000 units, with A more profitable at low volumes

B) 4,000 dollars, with A more profitable at low volumes

C) 4,000 units, with B more profitable at low volumes

D) 4,000 dollars, with B more profitable at low volumes

E) none of the above

Diff: 2

Topic: Break-even analysis

AACSB: Analytic Skills

Objective: LO7-Supplement-4

48) A shop wants to increase capacity by adding a new machine. The firm is considering proposals from vendor A and vendor B. The fixed costs for machine A are $90,000 and for machine B, $75,000. The variable cost for A is $15.00 per unit and for B, $18.00. The revenue generated by the units processed on these machines is $22 per unit. If the estimated output is 9,000 units, which machine should be purchased?

A) machine A

B) machine B

C) either machine A or machine B

D) no purchase because neither machine yields a profit at that volume

E) purchase both machines since they are both profitable

Diff: 2

Topic: Break-even analysis

AACSB: Analytic Skills

Objective: LO7-Supplement-4

49) Break-even analysis can be used by a firm that produces more than one product, but

A) the results are estimates, not exact values

B) the firm must allocate some fixed cost to each of the products

C) each product has its own break-even point

D) the break-even point depends upon the proportion of sales generated by each of the products

E) None of these statements is true.

Diff: 2

Topic: Break-even analysis

Objective: LO7-Supplement-4

50) The basic break-even model can be modified to handle more than one product. This extension of the basic model requires

A) price and sales volume for each product

B) price and variable cost for each product, and the percent of sales that each product represents

C) that the firm have very low fixed costs

D) that the ratio of variable cost to price be the same for all products

E) sales volume for each product

Diff: 2

Topic: Break-even analysis

Objective: LO7-Supplement-4

51) A product sells for $5, and has unit variable costs of $3. This product accounts for $20,000 in annual sales, out of the firm's total of $60,000. The weighted contribution of this product is approximately

A) 0.133

B) 0.200

C) 0.40

D) 0.667

E) $1.667

Diff: 2

Topic: Break-even analysis

AACSB: Analytic Skills

Objective: LO7-Supplement-4

52) Lag and straddle strategies for increasing capacity have what main advantage over a leading strategy?

A) They are cheaper.

B) They are more accurate.

C) They delay capital expenditure.

D) They increase demand.

E) all of the above

Diff: 2

Topic: Reducing risk with incremental changes

Objective: LO7-Supplement-1

53) The three main strategies for increasing capacity are

A) leading, lag, straddle

B) fast, normal, slow

C) expensive

D) leading, behind, mixed

E) none of the above

Diff: 2

Topic: Reducing risk with incremental changes

Objective: LO7-Supplement-1

54) A common method used to increase capacity with a lag strategy is

A) overtime

B) subcontractors

C) new facilities

D) new machinery

E) A and B

Diff: 2

Topic: Reducing risk with incremental changes

Objective: LO7-Supplement-1

55) Net present value

A) is gross domestic product less depreciation

B) is sales volume less sales and excise taxes

C) is profit after taxes

D) ignores the time value of money

E) is the discounted value of a series of future cash receipts

Diff: 2

Topic: Applying investment analysis to strategy-driven investments

Objective: LO7-Supplement-6

56) Net present value will be greater

A) as a fixed set of cash receipts occurs later rather than earlier

B) as the total of the cash receipts, made in same time periods, is smaller

C) for one end-of-year receipt of $1200 than for twelve monthly receipts of $100 each

D) for a 4% discount rate than for a 6% discount rate

E) All of the above are true.

Diff: 2

Topic: Applying investment analysis to strategy-driven investments

Objective: LO7-Supplement-6

57) A capacity alternative has an initial cost of $50,000 and cash flow of $20,000 for each of the next four years. If the cost of capital is 5 percent, the net present value of this investment is

A) greater than $80,000

B) greater than $130,000

C) less than $30,000

D) Impossible to calculate, because no interest rate is given.

E) Impossible to calculate, because variable costs are not known.

Diff: 2

Topic: Applying investment analysis to strategy-driven investments

AACSB: Analytic Skills

Objective: LO7-Supplement-6

58) A capacity alternative has an initial cost of $50,000 and cash flow of $20,000 for each of the next four years. If the cost of capital is 5 percent, the net present value of this investment is approximately

A) $20,920

B) $26,160

C) $49,840

D) $70,920

E) $106,990

Diff: 2

Topic: Applying investment analysis to strategy-driven investments

AACSB: Analytic Skills

Objective: LO7-Supplement-6

59) The theory of constraints has its origins in

A) linear programming theory

B) the theory of economies of scale

C) material requirements planning

D) the theory of finite capacity planning

E) Goldratt and Cox's book, The Goal: A Process of Ongoing Improvement

Diff: 1

Topic: Bottleneck analysis and the TOC

Objective: LO7-Supplement-3

60) Which of the following techniques is not a technique for dealing with a bottleneck?

A) Schedule throughput to match capacity of the bottleneck.

B) Increase capacity of the constraint.

C) Have cross-trained employees available to keep the constraint at full operation.

D) Develop alternate routings.

E) All are tools for dealing with bottlenecks.

Diff: 1

Topic: Bottleneck analysis and the TOC

Objective: LO7-Supplement-3

61) In "drum, buffer, rope," what provides the schedule, i.e. the pace of production?

A) drum

B) buffer

C) rope

D) all three of the above in combination

E) none of the above

Diff: 2

Topic: Bottleneck analysis and the TOC

Objective: LO7-Supplement-3

62) In "drum, buffer, rope," the __________ acts like kanban signals.

Diff: 2

Topic: Bottleneck analysis and the TOC

Objective: LO7-Supplement-3

63) __________ is the amount a facility can hold, store, receive, or produce in a period of time.

Diff: 2

Topic: Capacity

Objective: LO7-Supplement-1

64) __________ is actual output as a percent of design capacity.

Diff: 2

Topic: Capacity

Objective: LO7-Supplement-2

65) __________ is actual output as a percent of effective capacity.

Diff: 2

Topic: Capacity

Objective: LO7-Supplement-2

66) In the service sector, scheduling customers is __________, and scheduling the workforce is __________.

Diff: 2

Topic: Capacity

Objective: LO7-Supplement-2

67) The capacity planning strategy that delays adding capacity until capacity is below demand, then adds a capacity increment so that capacity is above demand, is said to__________ demand.

Diff: 2

Topic: Capacity

Objective: LO7-Supplement-2

68) __________ analysis finds the point at which costs equals revenues.

Diff: 2

Topic: Break-even analysis

Objective: LO7-Supplement-4

69) __________ cost is the cost that continues even if no units are produced.

Diff: 2

Topic: Break-even analysis

Objective: LO7-Supplement-4

70) Multiproduct break-even analysis calculates the __________ of each product, __________ it in proportion to each product's share of total sales.

Diff: 2

Topic: Break-even analysis

Objective: LO7-Supplement-4

71) __________ is a means of determining the discounted value of a series of future cash receipts.

Diff: 2

Topic: Applying investment analysis to strategy-driven investments

Objective: LO7-Supplement-6

72) Some organizations use number of beds, number of rooms, or room size to measure capacity. There's no time period in this capacity, and no "throughput." Why are these firms using such a different concept of capacity?

Diff: 3

Topic: Capacity

AACSB: Reflective Thinking

Objective: LO7-Supplement-1

73) What is the fundamental distinction between design capacity and effective capacity? Provide a brief example.

Diff: 2

Topic: Capacity

Objective: LO7-Supplement-2

74) Distinguish between utilization and efficiency.

Diff: 2

Topic: Capacity

Objective: LO7-Supplement-2

75) Why is the capacity decision important?

Diff: 2

Topic: Capacity

Objective: LO7-Supplement-1

76) A good capacity decision requires that it be tightly integrated with the organization's strategy and investments. But there are other "considerations" to making a good capacity decision. Name them. Describe each in a sentence or two.

Diff: 2

Topic: Capacity

Objective: LO7-Supplement-1

77) A sugar mill receives sugar cane from farmers, extracts the juice, boils it into syrup, and then crystallizes the syrup into raw sugar. There has been an ongoing consolidation of sugar mills, and an increase in the capacity of those that remain. The number of mills in Louisiana was 48 in the 1960s, was 18 in 1999 and is currently 13. In 1999 the break-even point for a typical mill was 600,000 tons. But as the surviving mills have added capacity, the break-even point is now 1,000,000 tons. In 1999, the state's farmers produced 16,000,000 tons of cane, but by 2004, the crop was down to 13,000,000 tons. Analyze this situation with what you have learned about the capacity decision. Is the industry better off with fewer but larger mills, or not?

Diff: 3

Topic: Capacity, Break-even analysis

AACSB: Reflective Thinking

Objective: LO7-Supplement-4

78) Identify the tactics for matching capacity to demand.

Diff: 2

Topic: Capacity

Objective: LO7-Supplement-1

79) Define fixed costs.

Diff: 2

Topic: Break-even analysis

Objective: LO7-Supplement-4

80) Define variable costs. What special assumption is made about variable costs in the textbook?

Diff: 2

Topic: Break-even analysis

Objective: LO7-Supplement-4

81) How is break-even analysis useful in the study of the capacity decision? What limitations does this analytical tool have in this application?

Diff: 2

Topic: Break-even analysis

Objective: LO7-Supplement-4

82) Describe how EMV might be used to analyze a capacity decision.

Diff: 2

Topic: Applying EMV to capacity decisions

Objective: LO7-Supplement-5

83) What are the assumptions of the net present value technique?

• Interest rates are known for the entire term of the investment.

• Payments are made at the end of each time period.

• Investments with similar net present values are similar in other respects (at least, we make this assumption if net present value is the only method of evaluation of investment used).

Diff: 2

Topic: Applying investment analysis to strategy-driven investments

Objective: LO7-Supplement-6

84) Describe the theory of constraints in a sentence.

Diff: 1

Topic: Bottleneck analysis and the TOC

Objective: LO7-Supplement-3

85) Identify, in proper sequence, the steps in the process of recognizing and managing constraints.

Step 1: Identify the constraints.

Step 2: Develop a plan for overcoming them.

Step 3: Focus resources on accomplishing step 2.

Step 4: Off-load work from the constraint or expand capability at the constraint.

Step 5: Once one set of constraints is overcome, go back to step 1 and identify new constraints.

Diff: 2

Topic: Bottleneck analysis and the TOC

Objective: LO7-Supplement-3

86) Explain the importance of a bottleneck operation in a production sequence.

Diff: 2

Topic: Bottleneck analysis and the TOC

Objective: LO7-Supplement-3

87) What techniques exist for dealing with bottlenecks? Which of these leads to increased capacity? Which of these leads to more throughput without adding capacity? Do any of these techniques fail to increase throughput?

1. Increase the capacity of the constraint. This obviously increases capacity.

2. Have well-trained and cross-trained employees keep the bottleneck at full operation. This increases capacity.

3. Develop alternate routings. This makes better use of existing capacity.

4. Move inspection and testing points to positions that precede the bottleneck, to avoid wasting bottleneck capacity on bad items. This makes better use of existing capacity.

5. Schedule throughput to match the bottleneck's capacity. There's no more throughput, but there may be lower costs at other work centers.

Diff: 3

Topic: Bottleneck analysis and the TOC

Objective: LO7-Supplement-3

88) The staff training center at a large regional hospital provides training sessions in CPR to all employees. Assume that the capacity of this training system was designed to be 1800 employees per year. Since the training center was first put in use, the program has become more complex, so that 1400 now represents the most employees that can be trained per year. In the past year, 1350 employees were trained. Calculate the efficiency and the utilization of this system.

Diff: 2

Topic: Capacity

AACSB: Analytic Skills

Objective: LO7-Supplement-2

89) An executive conference center has the physical ability to handle 1,100 participants. However, conference management personnel believe that only 1,000 participants can be handled effectively for most events. The last event, although forecasted to have 1,000 participants, resulted in the attendance of only 950 participants. What are the utilization and efficiency of the conference facility?

Effective Capacity = 1,000 participants

Actual Output = 950 participants

Utilization = = = 86.4%

Efficiency = = = 95.0%

Diff: 2

Topic: Capacity

AACSB: Analytic Skills

Objective: LO7-Supplement-2

90) A fleet repair facility has the capacity to repair 800 trucks per month. However, due to scheduled maintenance of their equipment, management feels that they can repair no more than 600 trucks per month. Last month, two of the employees were absent several days each, and only 400 trucks were repaired. What are the utilization and efficiency of the repair shop?

Effective Capacity = 600 trucks

Actual Output = 400 trucks

Utilization = = = 50.0%

Efficiency = = = 66.7%

Diff: 2

Topic: Capacity

AACSB: Analytic Skills

Objective: LO7-Supplement-2

91) The local convenience store makes personal pan pizzas. Currently, their oven can produce 50 pizzas per hour. It has a fixed cost of $2,000, and a variable cost of $0.25 per pizza. The owner is considering a bigger oven that can make 75 pizzas per hour. It has a fixed cost of $3,000, but a variable cost of $0.20 per pizza.

a. At what quantity do the two ovens have equal costs?

b. If the owner expects to sell 9,000 pizzas, should he get the new oven?

(a) The crossover is where $2,000 + .25X = $3,000 + .20X. Simplifying, 0.05X = 1000, or X = 20,000 units

(b) no, stay with the current oven.

Diff: 2

Topic: Break-even analysis

AACSB: Analytic Skills

Objective: LO7-Supplement-4

92) A product is currently made in a process-focused shop, where fixed costs are $9,000 per year and variable cost is $50 per unit. The firm sells the product for $200 per unit. What is the break-even point for this operation? What is the profit (or loss) on a demand of 200 units per year?

Diff: 2

Topic: Break-even analysis

AACSB: Analytic Skills

Objective: LO7-Supplement-4

93) A product is currently made in a process-focused shop, where fixed costs are $8,000 per year and variable cost is $40 per unit. The firm currently sells 200 units of the product at $200 per unit. A manager is considering a repetitive focus to lower costs (and lower prices, thus raising demand). The costs of this proposed shop are fixed costs = $24,000 per year and variable costs = $10 per unit. If a price of $80 will allow 400 units to be sold, what profit (or loss) can this proposed new process expect? Do you anticipate that the manager will want to change the process? Explain.

Old: TR = $40,000, TC = $16,000, therefore Profit = $24,000.

New: TR = $80 x 400 = $32,000, TC = $24,000 + $10 x 400 = $28,000, for a profit of $4,000.

Most will say NO; the larger repetitive process is less profitable than the smaller process-focused shop.

Diff: 2

Topic: Break-even analysis

AACSB: Analytic Skills

Objective: LO7-Supplement-4

94) A firm sells two products. Product R sells for $20; its variable cost is $6. Product S sells for $50; its variable cost is $30. Product R accounts for 60 percent of the firm's sales, while S accounts for 40 percent. The firm's fixed costs are $4 million annually. Calculate the firm's break-even point.

Diff: 2

Topic: Break-even analysis

AACSB: Analytic Skills

Objective: LO7-Supplement-4

95) A firm is weighing three capacity alternatives: small, medium, and large job shop. Whatever capacity choice is made, the market for the firm's product can be "moderate" or "strong." The probability of moderate acceptance is estimated to be 40 percent; strong acceptance has a probability of 60 percent. The payoffs are as follows. Small job shop, moderate market = $24,000; Small job shop, strong market = $54,000. Medium job shop, moderate market = $20,000; medium job shop, strong market = $64,000. Large job shop, moderate market = -$2,000; large job shop, strong market = $96,000. Which capacity choice should the firm make?

Diff: 2

Topic: Applying EMV to capacity decisions

AACSB: Analytic Skills

Objective: LO7-Supplement-5

96) The efficiency of a factory is 75% and its utilization 50%. If effective capacity is 1000 find design capacity.

Diff: 2

Topic: Capacity

AACSB: Analytic Skills

Objective: LO7-Supplement-2

97) A factory outputs 1000 units a month. If design capacity is 3000 and efficiency is 50% find utilization and effective capacity.

Diff: 2

Topic: Capacity

AACSB: Analytic Skills

Objective: LO7-Supplement-2

98) A graphic design studio is considering three new computers. The first model, A, costs $5000. Model B and C cost $3000 and $1000 respectively. If each customer provides $50 of revenue and variable costs are $20/customer, find the number of customers required for each model to break even.

B: BEP= 3000/(50-20) = 100 customers

C: BEP = 1000/(50-20) = 33.3 customers

Diff: 2

Topic: Break-even analysis

AACSB: Analytic Skills

Objective: LO7-Supplement-4

99) A firm is considering adding a second secretary to answer phone calls and make appointments. The cost of the secretary will be $10/hour and she will work 200 hours each month. If each new client adds $400 of profit to the firm, how many clients must the secretary arrange for the firm to break even? Suppose that the secretary has an equal chance of providing either 0, 2, or 6 new clients each month. Should the firm hire the secretary?

EMV=.33(0*400)+.33(2*400)+.33(6*400)= $1056. Since EMV is less than the $2000 the secretary costs, the firm should not hire.

Diff: 2

Topic: Break-even analysis

AACSB: Analytic Skills

Objective: LO7-Supplement-4

100) A local business owner is considering adding another employee to his staff in an effort to increase the number of hours the store is open per day.

a. If the employee will cost the owner $4,000 per month and the store takes in $50/hour in revenue with variable costs of $15/hour, how many hours must the new employee work for the owner to break even?

b. The employee again costs $4000 and has agreed to work 120 hours. If variable costs remain at $15/hour and revenue is uncertain with a 40% chance of being $40/hour, 35% chance of being $20/hour, and 25% chance of being $35/hour should the owner hire the employee?

A- BEP = 4000/(50-15) = 114.3 hours

B- EMV= .4(120*(40-15))+.35(120*(20-15))+.25(120*(35-15))= $2010. Since EMV is less than the $4000 cost of the employee the owner should not hire.

Diff: 2

Topic: Break-even analysis, Applying expected monetary value (EMV) to capacity decisions

AACSB: Analytic Skills

Objective: LO7-Supplement-5

101) A firm produces three products in a repetitive process facility. Product A sells for $60; its variable costs are $20. Product B sells for $200; its variable costs are $80. Product C sells for $25; its variable costs are $15. The firm has annual fixed costs of $320,000. Last year, the firm sold 1000 units of A, 2000 units of B, and 10,000 units of C. Calculate the break-even point of the firm. The firm has some idle capacity at these volumes, and chooses to cut the selling price of A from $60 to $45, believing that its sales volume will rise from 1000 units to 2500 units. What is the revised break-even point?

The original break-even for this firm was $320,000 / .5352 = $597,907. This is a calculator-based result; Excel reports $597,895

When the price of A is reduced, the revised calculations are:

The firm's breakeven point has increased to $320,000 / .5280 = $606,061. (Calculator-based; Excel reports $606,211).

Diff: 3

Topic: Break-even analysis

AACSB: Analytic Skills

Objective: LO7-Supplement-4

102) Health Care Systems of the South is about to buy an expensive piece of diagnostic equipment. The company estimates that it will generate uniform revenues of $500,000 for each of the next eight years. What is the present value of this stream of earnings, at an interest rate of 6%? What is the present value if the machine lasts only six years, not eight? If the equipment cost $2,750,000, should the company purchase it?

The company should purchase the equipment if it believes it will last eight years, but not if it fears that it will last only six.

Diff: 2

Topic: Applying investment analysis to strategy-driven investments

AACSB: Analytic Skills

Objective: LO7-Supplement-6

103) A firm produces three products. Product A sells for $60; its variable costs are $20. Product B sells for $200; its variable costs are $120. Product C sells for $25; its variable costs are $10. Last year, the firm sold 1000 units of A, 2000 units of B, and 10,000 units of C. The firm has fixed costs of $320,000 per year. Calculate the break-even point of the firm.

Break-even for this firm is $320,000 / .4931 = $648,956. Note: this result reflects calculator rounding, as students might experience at exam time. Excel reports $649,143.

Diff: 2

Topic: Break-even analysis

AACSB: Analytic Skills

Objective: LO7-Supplement-4

104) A firm is about to undertake the manufacture of a product, and is weighing three capacity alternatives: small job shop, large job shop, and repetitive manufacturing. The small job shop has fixed costs of $3,000 per month, and variable costs of $10 per unit. The larger job shop has fixed costs of $12,000 per month and variable costs of $3 per unit. The repetitive manufacturing plant has fixed costs of $30,000 and variable costs of $1 per unit. Demand for the product is expected to be 1,000 units per month with "moderate" market acceptance, but 2,000 under "strong" market acceptance. The probability of moderate acceptance is estimated to be 60 percent; strong acceptance has a probability of 40 percent. The product will sell for $25 per unit regardless of the capacity decision. Which capacity choice should the firm make?

Diff: 3

Topic: Applying EMV to capacity decisions

AACSB: Analytic Skills

Objective: LO7-Supplement-5

105) A new machine tool is expected to generate receipts as follows: $5,000 in year one; $3,000 in year two, nothing in the next year, and $2,000 in the fourth year. At an interest rate of 6%, what is the present value of these receipts? Is this a better present value than $2,500 each year over four years? Explain.

Diff: 2

Topic: Applying investment analysis to strategy-driven investments

AACSB: Analytic Skills

Objective: LO7-Supplement-6

106) Advantage Milling Devices is preparing to buy a new machine for precision milling of special metal alloys. This device can earn $300 per hour, and can run 3,000 hours per year. The machine is expected to be this productive for four years. If the interest rate is 6%, what is the present value? What is the present value if the interest rate is not 6%, but 9%? Why does present value fall when interest rates rise?

NPV falls because higher interest rates create a greater discount on future receipts.

Diff: 2

Topic: Applying investment analysis to strategy-driven investments

AACSB: Analytic Skills

Objective: LO7-Supplement-6

107) Suppose that the market has a 70% chance of being favorable and a 30% chance of being unfavorable. A favorable market will yield a profit of $300,000, while an unfavorable market will yield a profit of $20,000. What is the expected monetary value (EMV) in this situation?

Diff: 1

Topic: Applying EMV to capacity decisions

AACSB: Analytic Skills

Objective: LO7-Supplement-5