Operations Management, 11e (Krajewski et al.)
Chapter 4: Capacity Planning
4.1 Planning Long-Term Capacity
1) Capacity is the maximum rate of output of a process.
Answer: TRUE
Reference: Planning Long-Term Capacity
Difficulty: Easy
Keywords: capacity, maximum output rate
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
2) Capacity can be expressed by output or input measures.
Answer: TRUE
Reference: Planning Long-Term Capacity
Difficulty: Moderate
Keywords: capacity, input measures, output measures
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
3) Input measures of capacity are inherently more accurate than output measures of capacity.
Answer: FALSE
Reference: Planning Long-Term Capacity
Difficulty: Moderate
Keywords: input measures, output measures, capacity
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
4) Utilization is the degree to which equipment, space, or labor is currently being used.
Answer: TRUE
Reference: Planning Long-Term Capacity
Difficulty: Easy
Keywords: utilization, equipment used, space used, labor used
5) One reason economies of scale drive down cost is the spreading of fixed costs.
Answer: TRUE
Reference: Planning Long-Term Capacity
Difficulty: Moderate
Keywords: economies of scale, fixed cost
6) Diseconomies of scale is a concept that states that the average unit cost of a service or good can be
reduced by increasing its output rate.
Answer: FALSE
Reference: Planning Long-Term Capacity
Difficulty: Easy
Keywords: diseconomies of scale, average unit cost, output rate
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
7) Long-term capacity plans deal with:
1. A) investments in new facilities.
2. B) workforce size.
3. C) inventories.
4. D) overtime budgets.
Answer: A
Reference: Planning Long-Term Capacity
Difficulty: Moderate
Keywords: long-term capacity, new facilities
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
8) Long-term capacity decisions that confront managers include all of the following EXCEPT:
1. A) capital equipment.
2. B) additional land.
3. C) buildings.
4. D) workforce size.
Answer: D
Reference: Planning Long-Term Capacity
Difficulty: Moderate
Keywords: long-term capacity
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
9) Regarding the measurement of capacity, when a firm provides a relatively small number of standardized
products and services:
1. A) capacity cannot be determined reliably.
2. B) input measures are typically used.
3. C) output measures are typically used.
4. D) utilization becomes equal to capacity.
Answer: C
Reference: Planning Long-Term Capacity
Difficulty: Moderate
Keywords: output measure, capacity
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
10) One of the many steps in the production of toothpaste is to screw the caps on the tubes, which is still a
manual process, performed by one man, Mr. Bucket. Which statement about this situation is BEST?
1. A) This is most appropriate for an output measure of capacity.
2. B) This is most appropriate for an input measure of capacity.
3. C) Utilization of the worker at this process step cannot be measures as it is a manual process.
4. D) In this case, the capacity of this step is not the maximum rate of output.
Answer: A
11) Input measures include such metrics as:
1. A) the number of customers served per hour.
2. B) the number of trucks produced per day.
3. C) the number of machine hours available.
4. D) the number of bills processed in a week.
Answer: C
Reference: Planning Long-Term Capacity
Difficulty: Moderate
Keywords: input measure, capacity
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
12) The degree to which equipment, space, or labor is being used is commonly referred to as:
1. A) capacity.
2. B) output.
3. C) utilization.
4. D) cushion.
Answer: C
Reference: Planning Long-Term Capacity
Difficulty: Moderate
Keywords: utilization, capacity
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
13) Although the fire marshal had declared the capacity of the classroom at 45 students, the introduction to
operations management class was so popular, the average attendance was 55 students, literally standing
room only. Shouts of "You the man!" accompanied the successful solution of problems such as this: What is
the utilization of the operations management professor?
1. A) 122%
2. B) 100%
3. C) 55 students
4. D) 45 students
Answer: A
14) Although the fire marshal had declared the capacity of the classroom at 55 students, the introduction to
operations management class was so popular, the average attendance was 75 students, literally standing
room only. Squeals of excitement and the occasional burning of an overturned car accompanied the
successful solution of problems such as this: What is the utilization of the operations management
professor?
1. A) 100%
2. B) 136%
3. C) 75
4. D) 55
Answer: B
Reference: Planning Long-Term Capacity
Difficulty: Easy
Keywords: utilization, capacity
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Analytical Thinking
15) The test bank author abandoned his teaching duties when he was in the zone working on a test bank.
Normally scheduled to teach a nine-hour load during the semester, he generally made his way to one threehour class a week, one where his students could propose devious problems that were sure to confound
generations of test takers. What is the test bank author's utilization for his teaching duties?
1. A) three hours
2. B) nine hours
3. C) 33%
4. D) 300%
Answer: C
Reference: Planning Long-Term Capacity
Difficulty: Moderate
Keywords: utilization, capacity
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Analytical Thinking
16) A manufacturing plant is capable of producing 10 tons of product per day when it runs three shifts with
no breakdowns and plenty of raw materials. Over the past week, the plant has produced an average of 7.3
tons per day because the third shift has devoted much of their time to preventive maintenance. What is the
utilization of the plant?
1. A) 10 tons/day
2. B) 7.3 tons/day
3. C) 137%
4. D) 73%
Answer: D
Reference: Planning Long-Term Capacity
Difficulty: Moderate
Keywords: utilization, capacity
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Analytical Thinking
17) A manufacturing plant is capable of producing 10 tons of product per day when it runs three shifts with
no breakdowns and plenty of raw materials. Over the past week, the plant has produced an average of 7.3
tons per day since the third shift has devoted much of their time to preventive maintenance. What is the
capacity of the plant?
1. A) 10 tons/day
2. B) 7.3 tons/day
3. C) 73%
4. D) 137%
Answer: A
18) The transition from economies of scale to diseconomies of scale:
1. A) is more likely to occur in a service operation.
2. B) is more likely to occur in a manufacturing operation.
3. C) is more likely to occur when utilization is low.
4. D) contains the point at which average unit costs are at their lowest.
Answer: D
Reference: Planning Long-Term Capacity
Difficulty: Moderate
Keywords: economies of scale, diseconomies of scale
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
19) ________ is the maximum rate of output for a process.
Answer: Capacity
Reference: Planning Long-Term Capacity
Difficulty: Easy
Keywords: capacity, maximum rate of output
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
20) Capacity decisions should be linked closely to ________ and ________ throughout the organization.
Answer: processes, supply chains
Reference: Planning Long-Term Capacity
Difficulty: Moderate
Keywords: capacity decision, strategy, process, supply chains
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
21) ________ is the degree to which equipment, space, or labor is currently being used.
Answer: Utilization
Reference: Planning Long-Term Capacity
Difficulty: Easy
Keywords: utilization, use of equipment, space, labor
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
22) The ________ concept states that the average unit cost of a service or good can be reduced by increasing
its output rate.
Answer: economies of scale
Reference: Planning Long-Term Capacity
Difficulty: Easy
Keywords: economies of scale
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
23) ________ occurs when the average cost per unit increases as the facility's size increases.
Answer: Diseconomies of scale
Reference: Planning Long-Term Capacity
Difficulty: Easy
Keywords: diseconomies of scale
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
4.2 Capacity Timing and Sizing Strategies
1) A capacity cushion is the amount of inventory that a firm maintains to handle sudden increases in demand
or temporary loss of production capacity.
Answer: FALSE
Reference: Capacity Timing and Sizing Strategies
Difficulty: Moderate
Keywords: capacity cushion
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
2) A larger capacity cushion may be required due to variation in demand, changing product mix, or supply
uncertainty.
Answer: TRUE
Reference: Capacity Timing and Sizing Strategies
Difficulty: Moderate
Keywords: capacity cushion, variation in demand, changing product mix, supply uncertainty
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
3) A smaller capacity cushion may be required if a process is highly capital intensive.
Answer: TRUE
Reference: Capacity Timing and Sizing Strategies
Difficulty: Moderate
Keywords: capacity cushion, capital intensity
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
4) A larger capacity cushion can help firms uncover process inefficiencies, so they can find ways to correct
them.
Answer: FALSE
Reference: Capacity Timing and Sizing Strategies
Difficulty: Moderate
Keywords: capacity cushion, process inefficiencies
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
5) Capacity cushions may be lowered if companies smooth the output rate by raising prices when inventory
is low and decreasing prices when it is high.
Answer: TRUE
Reference: Capacity Timing and Sizing Strategies
Difficulty: Moderate
Keywords: capacity cushion, output rate, changes in pricing, inventory levels
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
6) An expansionist capacity strategy involves large, infrequent jumps in capacity, where a wait-and-see
strategy involves smaller, more frequent jumps.
Answer: TRUE
Reference: Capacity Timing and Sizing Strategies
Difficulty: Moderate
Keywords: expansionist strategy, wait-and-see strategy, size and timing of capacity increases
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
7) A wait-and-see capacity strategy minimizes the chances of lost sales due to insufficient capacity.
Answer: FALSE
Reference: Capacity Timing and Sizing Strategies
Difficulty: Moderate
8) A firm may preempt the expansion of competitive firms by using an expansionist capacity strategy and
announcing a large capacity expansion.
Answer: TRUE
Reference: Capacity Timing and Sizing Strategies
Difficulty: Moderate
Keywords: expansionist strategy, capacity expansion
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
9) An expansionist capacity strategy minimizes the risks of overexpansion due to overly optimistic demand
forecasts.
Answer: FALSE
Reference: Capacity Timing and Sizing Strategies
Difficulty: Moderate
Keywords: wait-and-see strategy, overexpansion, demand forecasts
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
10) Large, infrequent jumps in capacity are characteristic of companies that:
1. A) have an expansionist strategy.
2. B) have a wait-and-see strategy.
3. C) have low utilization.
4. D) have high utilization.
Answer: A
Reference: Capacity Timing and Sizing Strategies
Difficulty: Moderate
Keywords: expansionist capacity strategy
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
11) Which one of the following factors usually motivates a smaller capacity cushion?
1. A) unevenly distributed demands
2. B) high capital intensity
3. C) high penalty costs for overtime usage
4. D) requests for quick customer services
Answer: B
Reference: Capacity Timing and Sizing Strategies
Difficulty: Moderate
12) Which one of the following factors usually calls for a larger capacity cushion?
1. A) uncertain demand
2. B) high capital intensity
3. C) more reliable equipment
4. D) high worker flexibility
Answer: A
Reference: Capacity Timing and Sizing Strategies
Difficulty: Moderate
Keywords: capacity cushion, demand variability
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
13) Which one of the following statements about capacity cushions is BEST?
1. A) Companies with flexible flow processes tend to have small capacity cushions.
2. B) Companies with high capital costs tend to have large capacity cushions.
3. C) Companies that have considerable customization tend to have larger capacity cushions.
4. D) Constant demand rates require larger-capacity cushions.
Answer: C
Reference: Capacity Timing and Sizing Strategies
Difficulty: Moderate
Keywords: capacity cushion, customization
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
14) Which one of the following statements concerning capacity cushions is BEST?
1. A) Large capacity cushions are used more often when future demand is level and known.
2. B) Small capacity cushions are used extensively in capital intensive firms.
3. C) Capacity cushions are used primarily in manufacturing organizations, not in service organizations.
4. D) Small cushions are used in organizations where the products and services produced often change.
Answer: B
Reference: Capacity Timing and Sizing Strategies
Difficulty: Moderate
Keywords: capacity cushion, capital intensity
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
15) If a system is well balanced, which one of the following changes usually calls for a larger capacity
cushion?
1. A) higher capital intensity
2. B) higher worker flexibility
3. C) requests for fast delivery times
4. D) higher inventories
Answer: C
Reference: Capacity Timing and Sizing Strategies
Difficulty: Moderate
Keywords: balanced system, cushion capacity
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
16) It takes a service rep an average of two minutes to take a customer's information. Over the course of a
work week, the rep handles 160 calls a day during her eight-hour shift. What is the service rep's capacity
cushion?
1. A) 20%
2. B) 33%
3. C) 50%
4. D) 67%
Answer: B
Reference: Capacity Timing and Sizing Strategies
Difficulty: Moderate
Keywords: capacity cushion
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
17) It takes a service rep an average of two and a half minutes to take a customer's information. Over the
course of a work week, the rep handles 160 calls a day during her eight-hour shift. What is the service rep's
capacity cushion?
1. A) 16%
2. B) 33%
3. C) 50%
4. D) 66%
Answer: A
Reference: Capacity Timing and Sizing Strategies
Difficulty: Moderate
Keywords: capacity cushion
18) An expansionist capacity strategy:
1. A) lags behind demand.
2. B) reduces the risk of overexpansion based on overly optimistic demand forecasts.
3. C) can preempt expansion by competitors by announcing a large capacity expansion.
4. D) meets capacity shortfalls with overtime, temporary workers, subcontracting, and stockouts.
Answer: C
Reference: Capacity Timing and Sizing Strategies
Difficulty: Moderate
Keywords: capacity cushion, capacity expansion
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
19) A wait-and-see capacity strategy:
1. A) involves small, frequent jumps in capacity.
2. B) minimizes the chance of lost sales due to insufficient capacity.
3. C) can result in economies of scale and a fast rate of learning, yielding reduced manufacturing costs.
4. D) stays ahead of demand.
Answer: A
Reference: Capacity Timing and Sizing Strategies
Difficulty: Moderate
Keywords: capacity cushion, capacity jumps
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
20) ________ is the amount of reserve capacity that a firm maintains to handle a sudden increase in demand
or temporary losses of production capacity.
Answer: Capacity cushion
Reference: Capacity Timing and Sizing Strategies
Difficulty: Moderate
Keywords: capacity cushion, reserve capacity
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
21) If demand is increasing, and you also prefer to increase the time between capacity increments, then the
size of increments should ________.
Answer: increase
Reference: Capacity Timing and Sizing Strategies
Difficulty: Moderate
4.3 A Systematic Approach to Long-Term Capacity Decisions
1) A process's capacity requirement states the future process capacity needed to meet projected customer
demands, and includes an allowance for the desired capacity cushion.
Answer: TRUE
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: capacity requirement, customer demand, capacity cushion
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
2) A planning horizon is defined as the period beyond which the company does not have customer orders.
Answer: FALSE
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: time horizon
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
3) Output measures are used for estimating capacity requirements when product variety and process
divergence are high.
Answer: FALSE
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: input measures, capacity requirements, product variety, process divergence
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
4) Kristen made a batch of chocolate chip cookie dough and then had to clean the utensils and mixing bowl
before she made a batch of oatmeal raisin cookie dough. The time spent cleaning the bowl and utensils is an
example of setup time.
Answer: TRUE
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: setup time
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
5) As the desired capacity cushion increases, the processing hours required for a year's demand decrease.
Answer: FALSE
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: capacity cushion, capacity requirement
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
6) The capacity requirement for a year's output is inversely proportional to the total number of hours per
year during which the process operates.
Answer: TRUE
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: capacity requirement
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
7) Cash flow is the difference between the flows of funds into and out of an organization over a period of
time.
Answer: TRUE
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Easy
Keywords: cash flow
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
8) When a firm makes a long-term capacity decision, selecting the base case alternative means doing
nothing and losing orders from any demand that exceeds current capacity, or incurring costs due to excess
capacity.
Answer: TRUE
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: base case alternative, capacity decisions, capacity
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
9) The time required to change a machine from making one product or service to the next is called:
1. A) cycle time.
2. B) setup time.
3. C) queue time.
4. D) hold time.
Answer: B
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: setup time
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
10) A well-educated operations manager used the capacity requirements equation to determine the number
of cracker box welders to purchase for the shop, given the standard time per unit, hours available per
machine, among other relevant parameters. He studied the answer, 12.6, and concluded that:
1. A) he had made a mistake, since it isn't possible to purchase a fractional welder.
2. B) he needed to decrease his desired capacity cushion to bring him up to an even thirteen welders.
3. C) he should buy twelve welders and spend 50% more time per part to reach the 12.6 figure.
4. D) he should buy twelve welders and use all of them at 5% overtime to achieve the necessary output.
Answer: D
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: capacity, cushion
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Analytical Thinking
11) A well-educated operations manager used the capacity requirements equation to determine the number
of cracker box welders to purchase for the shop, given the standard time per unit, hours available per
machine, among other relevant parameters. He studied the answer, 2.2, and concluded that:
1. A) he had made a mistake, since it isn't possible to purchase a fractional welder.
2. B) he needed to decrease his desired capacity cushion to bring him up to exactly three welders.
3. C) he should buy two welders and authorize 10% overtime to reach the 2.2 figure.
4. D) he should buy two welders and reduce the time per part by 10% to reduce the capacity need to
two welders.
Answer: C
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: capacity, cushion
12) The single milling machine at Stout Manufacturing was severely overloaded last year. The plant
operates eight hours per day, five days per week, and 50 weeks per year. Management prefers a capacity
cushion of 15 percent. Two major types of products are routed through the milling machine. The annual
demand for product A is 3000 units and 2000 units for product B. The batch size for A is 20 units and 40
units for B. The standard processing time for A is 0.5 hours/unit and 0.8 hours/unit for B. The standard setup
time for product A is 2 hours and 8 hours for product B. How many new milling machines are required if
Stout does not resort to any short-term capacity options?
1. A) no new machines
2. B) 1 or 2 new machines
3. C) 3 or 4 new machines
4. D) more than 4 new machines
Answer: B
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: capacity requirement, evaluate alternatives, select alternative
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Analytical Thinking
Table 4.1
The Union Manufacturing Company is producing two types of products: A and B. The demand forecasts,
batch size, and time standards follow:
Product A
Product B
Demand forecast (units/yr)
1,000
4,000
Batch size (units/batch)
20
10
Processing time (hr/unit)
3.2
4.5
Setup time (hr/batch)
10
20
Both products are produced on the same machine, called Mark I.
13) Using Table 4.1, what is the total number of hours required of Mark I equipment for the next year?
1. A) fewer than 29,000 hours
2. B) between 29,000 and 30,000 hours
3. C) between 30,000 and 31,000 hours
4. D) more than 31,000 hours
Answer: B
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: capacity requirement, evaluate alternatives
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
14) Use the information in Table 4.1. The company works 250 days per year and operates two shifts, each
covering 8 hours. If a 15 percent capacity cushion is maintained, how many hours of capacity can the
company expect from each of its Mark I machines?
1. A) fewer than 3000
2. B) between 3000 and 3500
3. C) between 3501 and 4000
4. D) more than 4000
Answer: B
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: capacity requirement, evaluate alternatives
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Analytical Thinking
15) Use the information in Table 4.1. How many Mark I machines are required to produce Union
Manufacturing's for the year's production?
1. A) fewer than 4 machines
2. B) more than 4 but fewer than or equal to 6 machines
3. C) more than 6 but fewer than or equal to 8 machines
4. D) more than 8 machines
Answer: D
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: capacity requirement, evaluate alternatives, select alternative
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Analytical Thinking
16) A standard work year is 2080 hours at the Luther Mill and it takes about 2 hours to fill a customer order.
The manager at the mill is always concerned about employee idle time, so he aims for a capacity cushion of
two percent. Last year saw 15,000 customer orders at the mill and the manager has a new Mercedes in mind
as a company car, so he hopes that there is an increase of 10% in customer orders for next year. How many
workers will the manager need to have at the mill next year?
1. A) 10
2. B) 13
3. C) 16
4. D) 19
Answer: C
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: capacity requirement
17) A standard work year is 2000 hours at the Luther Mill and it takes about an hour and a half to fill a
customer order. The manager at the mill is always concerned about employee idle time, so he aims for a
capacity cushion of two percent. Last year saw 15,000 customer orders at the mill and the manager has a
new John Deere in mind as a company car, so he hopes that there is an increase of 15% in customer orders
for next year. How many workers will the manager need to have at the mill next year?
1. A) 10
2. B) 13
3. C) 16
4. D) 19
Answer: B
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: capacity requirement
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Analytical Thinking
18) A standard work year is 2000 hours at the Luther Mill and it takes about an hour and a half to fill a
customer order. Last year saw 15,000 customer orders at the mill and the manager has a new John Deere in
mind as a company car, so he hopes that there is an increase of 15% in customer orders for next year. If the
manager hires fourteen workers, what is the capacity cushion?
7. A) 7.6%
8. B) 8.2%
9. C) 6.9%
10. D) 8.8%
Answer: A
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: capacity requirement
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Analytical Thinking
19) A standard work year is 2000 hours at the Luther Mill and it takes about an hour and a half to fill a
customer order. Last year saw 25,000 customer orders at the mill and the manager has a rebuilt Ford 9N in
mind as a company car, so he hopes that there is an increase of 2% in customer orders for next year. If the
manager hires twenty workers, what is the capacity cushion?
3. A) 3.8%
4. B) 3.1%
5. C) 5.1%
6. D) 4.3%
Answer: A
20) The Southeast Manufacturing Company is producing two types of products: A and B. Demand forecasts
for next year and other production-related information are provided in the following table:
Product A
Product B
Demand forecast (units/yr)
4,000
12,000
Batch size (units/batch)
80
150
Processing time (hr/unit)
2.5
2.0
Setup time (hr/batch)
18
24
Both of these products are produced at the same workstation, called the Automatic Lathe. Currently, the
company has 12 automatic lathes, and financial constraints prevent any expansion for the next year. It works
250 days per year with two 8-hour shifts and desires a 25 percent capacity cushion. Which one of the
following alternatives will allow next year's demand to be fully covered?
1. A) Do nothing.
2. B) Increase the capacity cushion to 30 percent.
3. C) Increase the batch size of product B to 300 units.
4. D) Decrease the capacity cushion by 1 percent.
Answer: C
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: capacity requirement, evaluate alternatives, select alternative
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Analytical Thinking
21) The lock box department at Bank 21 handles the processing of monthly loan payments to the bank,
monthly and quarterly premium payments to a local insurance company, and bill payments for 85 of the
bank's largest commercial customers. The payments are processed by machine operators, with one operator
per machine. An operator can process one payment in 0.25 minute. Setup times are negligible in this
situation. A capacity cushion of 20 percent is needed for the operation. The average monthly (not annual)
volume of payments processed through the department currently is 400,000. However, it is expected to
increase by 20 percent. The department operates eight hours per shift, two shifts per day, 260 days per year.
How many machines (not operators) are needed to satisfy the new total processing volume? (Round up to
the next whole integer.)
1. A) fewer than 7
2. B) 7
3. C) 8
4. D) more than 8
Answer: C
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Hard
Keywords: capacity requirement, evaluate alternatives, select alternative
22) A company's production facility, consisting of two identical machines, currently caters only to product
A. The annual demand for the product is 4000 units. Management has now decided to introduce another
product, B, which uses the same facilities as that of product A. Product B has an annual demand of 2000
units. In view of the uncertainties involved in producing two products, management desires to have an
overall 10 percent capacity cushion. Given the following additional information, how many more machines
are required? (Assume 8 hours/shift, 2 shifts/day, 250 days/year, and that no overtime is allowed).
1. A) No additional machines are necessary.
2. B) One additional machine is necessary.
3. C) Two additional machines are necessary.
4. D) More than two additional machines are necessary.
Answer: C
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: capacity requirement, evaluate alternatives, select alternative
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Analytical Thinking
23) The Northern Manufacturing Company is producing products A and B, using the same machine called
MASAC27A. Demand forecasts for next year and other production-related information are provided in the
following table.
Product A
Product B
Demand forecast (units/yr)
4,000
12,000
Batch size (units/batch)
80
150
Processing time (hr/unit)
2.5
2.0
Setup time (hr/batch)
16
12
The company works 250 days per year and operates 2 shifts each day, each shift covering 8 hours. If 25
percent of capacity cushion is maintained throughout the year, how many machines (MASAC27A) does the
company need next year to meet the demand? (Round your answer up to the next whole machine.)
1. A) fewer than 11 machines
2. B) 11 machines
3. C) 12 machines
4. D) more than 12 machines
Answer: C
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: capacity requirement, evaluate alternatives, select alternative
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
24) George P. Burdell owns a hot tub store that is experiencing significant growth. Burdell is trying to
decide whether to expand the store's capacity, which currently is at $750,000 in sales per quarter. He is
thinking about expanding to the $850,000 level. The before-tax profit from additional sales is 20 percent.
Sales are seasonal, with peaks in the spring and summer quarters. Forecasts of capacity requirements,
expressed in ($000) sales per quarter, for next year (year 2) are:
Quarter
($000)
1
720
2
800
3
890
4
690
Demand in year 3 and beyond is expected to exceed $850,000 per quarter. Burdell is considering expansion
at the end of the fourth quarter of this year (year 1). How much would before-tax profits in year 2 increase
because of this expansion?
1. A) less than $28,000
2. B) more than $28,000 but less than $32,000
3. C) more than $32,000 but less than $36,000
4. D) more than $36,000
Answer: D
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: capacity requirement, before-tax profit
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Analytical Thinking
25) Sleep Tight Motel has the opportunity to purchase an adjacent plot of land. Building on this land would
increase their capacity from the current sales level of $515,000/year to $600,000/year. Sleep Tight
experiences a 20 percent before-tax profit margin. It wishes to estimate the additional before-tax profits that
the expansion will produce. Using the following information, how much more before-tax cash flow would
be realized just in year 10 alone?
Year
Capacity Requirement
(Annual Sales)
1
$515,000
2
$517,000
3
$520,000
4
$525,000
5
$540,000
6
$560,000
7
$565,000
8
$575,000
9
$600,000
10
$620,000
1. A) less than or equal to $20,000
2. B) greater than $20,000 but less than or equal to $25,000
3. C) greater than $25,000 but less than or equal to $30,000
4. D) greater than 30,000
Answer: A
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: capacity requirement, cash flow
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Analytical Thinking
26) Innovative Inc. is experiencing a boom for the products it has introduced recently. The estimated annual
sales projected for the next five years are given in the following table. The current capacity is equivalent to
only $100 million sales. The company is considering the alternative of expanding capacity to an equivalent
of $250 million sales. Assume a 25 percent pretax profit margin. What is the increase in total pretax cash
flow (summed over all years) that would be enjoyed because of the expansion?
Year
Annual Sales
(in $ million)
1
100
2
140
3
170
4
200
5
250
1. A) less than or equal to $40 million
2. B) more than $40 million but less than or equal to $70 million
3. C) more than $70 million but less than or equal to $100 million
4. D) more than $100 million
Answer: C
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: capacity requirement, cash flow
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Analytical Thinking
27) John Owen owns a drugstore that is experiencing significant growth. Owen is trying to decide whether
to expand its capacity, which currently is $200,000 in sales per quarter. Sales are seasonal. Forecasts of
capacity requirements, expressed in sales per quarter for the next year, follow.
Quarter
($000)
1
240
2
180
3
220
4
260
Owen is considering expanding capacity to the $250,000 level in sales per quarter. The before-tax profit
margin from additional sales is 15 percent. How much would before-tax profits increase next year because
of this expansion?
1. A) less than $15,000
2. B) more than $15,000 but less than $16,000
3. C) more than $16,000 but less than $17,000
4. D) more than $17,000
Answer: C
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: capacity requirement, evaluate alternatives, cash flow
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Analytical Thinking
Scenario 4.5
The T. H. King Company has introduced a new product line that requires two work centers, A and B for
manufacture. Work Center A has a current capacity of 10,000 units per year, and Work Center B is capable
of 12,500 units per year. This year (year 0), sales of the new product line are expected to reach 10,000 units.
Growth is projected at an additional 1,000 units each year through year 5. Pre-tax profits are expected to be
$30 per unit throughout the 5-year planning period. Two alternatives are being considered:
1) Expand both Work Centers A and B at the end of year 0 to a capacity of 15,000 units per year, at a total
cost for both Work Centers of $200,000;
2) Expand Work Center A at the end of year 0 to 12,500 units per year, matching Work Center B, at a cost
of $100,000, then expanding both Work Centers to 15,000 units per year at the end of year 3, at an
additional cost at that time of $200,000.
The King Company will not consider projects that don't show a 5th year positive net present value using a
discount rate of 15%.
28) Use the information in Scenario 4.5. What is the pre-tax cash flow (net present value) for alternative #1
compared to the base case of doing nothing for the next five years?
1. A) negative pre-tax cash flow
2. B) more than $0 but less than $40,000
3. C) more than $40,000 but less than $80,000
4. D) more than $80,000
Answer: C
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: capacity requirement, evaluate alternatives, cash flow
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Analytical Thinking
29) Use the information in Scenario 4.5. What is the pre-tax cash flow (net present value) for alternative #2
compared to the base case of doing nothing for the next five years?
1. A) negative pre-tax cash flow
2. B) more than $0 but less than $40,000
3. C) more than $40,000 but less than $80,000
4. D) more than $80,000
Answer: B
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: capacity requirement, evaluate alternatives, cash flow
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Analytical Thinking
30) Use the information in Scenario 4.5. What action, if any, should the King Company take?
1. A) Do nothing—neither alternative provides a positive net present value after five years.
2. B) Select Alternative #1.
3. C) Select alternative #2.
4. D) Either alternative may be selected, since the positive net present values are the same after five
years.
Answer: B
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: capacity requirement, evaluate alternatives, cash flow
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Analytical Thinking
Scenario 4.6
Burdell Labs is a diagnostic laboratory that does various tests (blood tests, urine tests, etc.) for doctors'
offices in the Indianapolis area. Test specimens are picked up at the doctors' offices and are transported to
the testing facility, with uniform arrivals throughout the day. All tests go through two testing centers in the
testing facility, Test Center A and Test Center B. A has a current capacity of 1,000 units per week, and B is
capable of 1,500 units per week. The facility operates 50 weeks per year. This year (year 0), test volumes are
expected to reach 1,000 units per week. Growth per week is projected at an additional 200 units through year
5 (i.e., 1,200 per week in year #1, 1,400 per week in year #2, etc.). Pre-tax profits are expected to be $5 per
test throughout the 5-year planning period. Two alternatives are being considered:
1) Expand both Test Centers A and B at the end of year 0 to a capacity of 2,000 units per week, at a total
cost for both Test Centers of $300,000;
2) Expand Test Center A at the end of year 0 to 1,500 units per week, matching Test Center B, at a cost of
$100,000, then expanding both Test Centers to 2,000 units per year at the end of year 3, at an additional cost
at that time of $250,000.
Burdell Labs will not consider projects that don't show a 5th year positive net present value using a discount
rate of 15%.
31) Use the information in Scenario 4.6. What is the pre-tax cash flow (net present value) for alternative #1
compared to the base case of doing nothing for the next five years?
1. A) negative pre-tax cash flow
2. B) more than $0 but less than $80,000
3. C) more than $80,000 but less than $160,000
4. D) more than $160,000
Answer: C
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: capacity requirement, evaluate alternatives, cash flow
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Analytical Thinking
32) Use the information in Scenario 4.6. What is the pre-tax cash flow (net present value) for alternative #2
compared to the base case of doing nothing for the next five years?
1. A) negative pre-tax cash flow
2. B) more than $0 but less than $80,000
3. C) more than $80,000 but less than $160,000
4. D) more than $160,000
Answer: D
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: capacity requirement, evaluate alternatives, cash flow
33) Use the information in Scenario 4.6. What action, if any, should the Burdell Labs take?
1. A) Do nothing—neither alternative provides a positive net present value after five years.
2. B) Select Alternative #1.
3. C) Select alternative #2.
4. D) Either alternative may be selected, since the positive net present values are the same after five
years.
Answer: C
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: capacity requirement, evaluate alternatives, cash flow
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Analytical Thinking
Scenario 4.7
The B. Sharp Company has a rapidly growing product line that requires two work centers, X and Y for
manufacture. Work Center X has a current capacity of 50,000 units per year, and Work Center Y is capable
of 55,000 units per year. This year (year 0), sales of the product line are expected to reach 50,000 units.
Growth is projected at an additional 3,000 units each year through year 3. Pre-tax profits are expected to be
$60 per unit throughout the 3-year planning period. Two alternatives are being considered:
1) Expand both Work Centers X and Y at the end of year 0 to a capacity of 60,000 units per year, at a total
cost for both Work Centers of $500,000;
2) Expand Work Center X at the end of year 0 to 55,000 units per year, matching Work Center Y, at a cost
of $300,000, then expanding both Work Centers to 60,000 units per year at the end of year 2, at an
additional cost at that time of $350,000.
The Sharp Company will not consider projects that don't show a 3rd year positive net present value using a
discount rate of 20%.
34) Use the information in Scenario 4.7. What is the pre-tax cash flow (net present value) for alternative #1
compared to the base case of doing nothing for the next five years?
1. A) negative pre-tax cash flow
2. B) more than $0 but less than $100,000
3. C) more than $100,000 but less than $200,000
4. D) more than $200,000
Answer: D
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: capacity requirement, evaluate alternatives, cash flow
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Analytical Thinking
35) Use the information in Scenario 4.7. What is the pre-tax cash flow (net present value) for alternative #2
compared to the base case of doing nothing for the next five years?
1. A) negative pre-tax cash flow
2. B) more than $0 but less than $100,000
3. C) more than $100,000 but less than $200,000
4. D) more than $200,000
Answer: C
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: capacity requirement, evaluate alternatives, cash flow
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Analytical Thinking
36) Use the information in Scenario 4.7. What action, if any, should the Sharp Company take?
1. A) Do nothing—neither alternative provides a positive net present value after three years.
2. B) Select Alternative #1.
3. C) Select alternative #2.
4. D) Either alternative may be selected, since the positive net present values are the same after three
years.
Answer: B
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: capacity requirement, evaluate alternatives, cash flow
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Analytical Thinking
Scenario 4.8
The Summerville Vitamin Company manufactures bottles of animal-shaped chewable vitamins for children.
This product line requires two work centers, tablet manufacturing and packaging. The tablet manufacturing
work center has a current capacity of 140,000 bottles per month, and packaging is capable of 100,000 units
per month. This year (year 0), monthly sales of the product line are expected to reach 100,000 units. Growth
per month is projected at an additional 25,000 units through year 4 (i.e., 125,000 per month in year #1,
150,000 per month in year #2, etc.). Pre-tax profits are expected to be $5 per unit throughout the 4-year
planning period. Two alternatives are being considered:
1) Expand both tablet manufacturing and packaging at the end of year 0 to a capacity of 200,000 units per
month, at a total cost for both work centers of $2,250,000;
2) Expand packaging at the end of year 0 to 140,000 units per year, matching tablet manufacturing, at a
cost of $1,200,000, then expanding both work centers to 200,000 units per month at the end of year 2, at an
additional cost at that time of $1,400,000.
Summerville will not consider projects that don't show a 4th year positive net present value using a discount
rate of 25%.
37) Use the information in Scenario 4.8. What is the pre-tax cash flow (net present value) for alternative #1
compared to the base case of doing nothing for the next four years?
5. A) less than or equal to $5.1 million
6. B) more than $5.1 million but less than $5.3 million
7. C) more than $5.3 million less than $5.5 million
8. D) more than $5.5 million
Answer: D
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: capacity requirement, evaluate alternatives, cash flow
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Analytical Thinking
38) Use the information in Scenario 4.8. What is the pre-tax cash flow (net present value) for alternative #2
compared to the base case of doing nothing for the next four years?
5. A) less than or equal to $5.1 million
6. B) more than $5.1 million but less than $5.3 million
7. C) more than $5.3 million less than $5.5 million
8. D) more than $5.5 million
Answer: C
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: capacity requirement, evaluate alternatives, cash flow
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Analytical Thinking
39) Use the information in Scenario 4.8. What action, if any, should Summerville take?
1. A) Find another option—neither alternative provides a positive net present value after four years.
2. B) Select Alternative #1.
3. C) Select alternative #2.
4. D) Either alternative may be selected, since the positive net present values are the same after four
years.
Answer: B
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: capacity requirement, evaluate alternatives, cash flow
40) Which of these phrases best describes the term base case?
1. A) the do-nothing alternative
2. B) thinking outside the box
3. C) working smarter, not harder
4. D) working harder, not smarter
Answer: A
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Easy
Keywords: base case
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
41) A process's ________ is what its capacity should be for some future time period to meet the demand of
its customers, allowing for the desired capacity cushion.
Answer: capacity requirement
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: capacity requirement
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
42) A process's ________ is the length of time it takes to switch from making one type of product to
another.
Answer: setup time
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: setup
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
43) The ________ is the set of consecutive time periods considered for planning purposes.
Answer: planning horizon
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Easy
Keywords: planning horizon
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
44) A ________ is the difference between demand and current capacity.
Answer: capacity gap
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Easy
Keywords: capacity gap
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
45) ________ are more appropriate measures of capacity in situations where a task that is initially difficult
and time-consuming to perform becomes second-nature and short in duration.
Answer: Input measures
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Easy
Keywords: input measures
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
46) The ________ is the act of doing nothing and losing orders from any demand that exceeds capacity, or
incurs costs because capacity is too large.
Answer: base case
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Easy
Keywords: base case
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
48) A printing company works on three types of printing jobs, each of which could be produced on the same
model printing machine. The predicted annual demands and typical order sizes are shown in the table. The
company has 2000 production hours available each year and requires a 10% capacity cushion to allow for
preventive maintenance, breakdowns, and other unforeseen circumstances. How many printing machines
must they have under these circumstances?
Job Type
Job A
Job B
Job C
Demand
6000
4000
5000
Process time per unit
.8
.75
.25
Average order size
40
100
50
setup time (hours)
1
.75
.5
Answer:
M=
= 5.15 → 6
49) A printing company works on three types of printing jobs, each of which could be produced on the same
model printing machine. The predicted annual demands and typical order sizes are shown in the table. The
company has 2000 production hours available each year and requires a 10% capacity cushion to allow for
preventive maintenance, breakdowns, and other unforeseen circumstances. They have floor space for five
printing machines. If the time needed to set up a printing machine to switch from one job to the next is
identical for all three job types, what must their setup time be to achieve their required output?
Job Type
Job A
Job B
Job C
Demand
6000
4000
5000
Process time per unit
.8
.75
.25
Average order size
40
100
50
Answer: It can't be done; the production time required is 4800 + 3000 + 1250 = 9050 hours, which exceeds
the 9000 hours available. The setup time would need to be a negative one-sixth of an hour in order to meet
the five machine limit.
M = 5.00
5 × 1800 = [4800 + 150s] + [3000 + 40s] + [1250 + 100s]
9000 - 4800 - 3000 - 1250 = 290s
-50 = 290s
s = -.1724 hours
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Hard
Keywords: utilization, capacity
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Analytical Thinking
50) The single milling machine at Fred's Manufacturing was severely overloaded last year. The plant
operates 8 hours per day, 5 days per week, and 50 weeks per year. Management prefers a capacity cushion
of 20 percent. Two major types of products are routed through the milling machine. The annual demand for
product A is 4000 units and 3000 units for product B. The batch size for A is 20 units and 30 units for B.
The standard processing time for A is 0.5 hours/unit and 0.8 for B. The standard setup time for product A is
2 hours and 8 hours for product B. How many new milling machines are required if Fred's does not resort to
any short-term capacity options?
Answer:
M=
where M = number of machines required, D = number of units forecast per year, p = processing time in
hours per unit, N = total number of hours per year that the process operates, C = desired capacity
cushion, Q = number of units in each batch, and s = setup time.
M = = 3.5 → 4 machines
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: capacity requirement
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Analytical Thinking
51) The Union Manufacturing Company is producing two types of products: A and B. The demand
forecasts, batch size, and time standards for the Mark I operation follow:
Product A
Product B
Demand forecast (units/yr)
1,000
4,000
Batch size (units/batch)
20
10
Processing time (hr/unit)
3.2
4.5
Setup time (hr/batch)
10
20
The company works 250 days per year and operates 2 shifts, each covering 8 hours. If a 20 percent capacity
cushion is maintained, how many new Mark I machines are required if Union does not resort to any shortterm capacity options?
Answer:
M=
where M = number of machines required, D = number of units forecast per year, p = processing time (in
hours per unit), N = total number of hours per year that the process operates, C = desired capacity
cushion, Q = number of units in each batch, and s = setup time.
M = = 9.28 → 10 machines
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Moderate
Keywords: capacity requirement
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Analytical Thinking
52) Larry's Wickets, Inc. is producing two types of products: A and B. Both are produced at the same
machining operation. Because of demand uncertainties, the operations manager obtained three demand
forecasts (pessimistic, expected, and optimistic). The demand forecasts, batch sizes (units/batch), processing
times (hr/unit), and setup times (hr/batch) follow.
The machines operate on two 8-hour shifts, 5 days per week, and 50 weeks per year. The manager wants to
maintain a 20 percent capacity cushion.
1. What is the minimum number of hours required of the machining equipment for the next year?
2. How many hours of capacity can the company expect from each machine?
3. What is the minimum number of machines needed (assuming no reliance on short-term options)?
4. What is the maximum number of machines needed (assuming no reliance on short-term options)?
Answer:
1. 81,800 hours
2. 3,200 hours
3. 26 machines
4. 34 machines
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Hard
Keywords: capacity cushion, capacity requirement
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Analytical Thinking
53) The T. H. King Company has introduced a new product line that requires two work centers, A and B for
manufacture. Work Center A has a current capacity of 10,000 units per year, and Work Center B is capable
of 12,500 units per year. This year (year 0), sales of the new product line are expected to reach 10,000 units.
Growth is projected at an additional 1,000 units each year through year 5. Pre-tax profits are expected to be
$30 per unit throughout the 5-year planning period. Two alternatives are being considered:
1) Expand both Work Centers A and B at the end of year 0 to a capacity of 15,000 units per year, at a total
cost for both Work Centers of $200,000;
2) Expand Work Center A at the end of year 0 to 12,500 units per year, matching Work Center B, at a cost
of $100,000, then expanding both Work Centers to 15,000 units per year at the end of year 3, at an
additional cost at that time of $200,000.
The King Company will not consider projects that don't show a 5th year positive net present value using a
discount rate of 15%. What are the pre-tax cash flows for the two alternatives compared to the base case of
doing nothing for the next five years, and what action, if any, should the company take?
Answer: The following table summarizes demand and output capabilities for the two alternatives:
Alternative #1 Net Present Value (in $000s)
= -200 + 30/1.15 + 60/(1.15)2 + 90/(1.15)3 + 120/(1.15)4 + 150/(1.15)5
= -200 + 26.1 + 45.4 + 59.2 + 68.6 + 74.6 = $73.9
Alternative #2 Net Present Value (in $000s)
= -100 + 30/1.15 + 60/(1.15)2 + (75 - 200)/(1.15)3 + 120/(1.15)4 + 150/(1.15)5
= -100 + 26.1 + 45.4 - 82.2 + 68.6 + 74.6 = $32.5
Both alternatives have a positive net present value after five years at a discount rate of 15%. However,
Alternative #1 has a higher net present value after the five-year period ($73,900 versus $32,500) and should
therefore be the alternative selected.
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Hard
Keywords: evaluating alternatives, net present value, pre-tax cash flow, discount rate
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Analytical Thinking
54) Burdell Labs is a diagnostic laboratory that does various tests (blood tests, urine tests, etc.) for doctors'
offices in the Indianapolis area. Test specimens are picked up at the doctors' offices and are transported to
the testing facility, with uniform arrivals throughout the day. All tests go through two testing centers in the
testing facility, Test Center A and Test Center B. A has a current capacity of 1,000 units per week, and B is
capable of 1,500 units per week. The facility operates 50 weeks per year. This year (year 0), test volumes are
expected to reach 1,000 units per week. Growth is projected at an additional 200 units each week through
year 5 (i.e., 1,200 per week in year #1, 1,400 per week in year #2, etc.). Pre-tax profits are expected to be $5
per test throughout the 5-year planning period. Two alternatives are being considered:
1) Expand both Test Centers A and B at the end of year 0 to a capacity of 2,000 units per week, at a total
cost for both Test Centers of $300,000;
2) Expand Test Center A at the end of year 0 to 1,500 units per week, matching Test Center B, at a cost of
$100,000, then expanding both Test Centers to 2,000 units per year at the end of year 3, at an additional cost
at that time of $250,000.
Burdell Labs will not consider projects that don't show a 5th year positive net present value using a discount
rate of 15%. What are the pre-tax cash flows for the two alternatives compared to the base case of doing
nothing for the next five years, and what action, if any, should Burdell take?
Answer: The following table summarizes demand and output capabilities for the two alternatives:
Alternative #1 Net Present Value (in $000s)
= -300 + 50/1.15 + 100/(1.15)2 + 150/(1.15)3 + 200/(1.15)4 + 250/(1.15)5
= -300 + 43.5 + 75.6 + 98.6 + 114.4 + 124.3 = $156.4
Alternative #2 Net Present Value (in $000s)
= -100 + 50/1.15 + 100/(1.15)2 + (125 - 250)/(1.15)3 + 200/(1.15)4 + 250/(1.15)5
= -100 + 43.5 + 75.6 - 82.2 + 114.4 + 124.3 = $175.6
Both alternatives have a positive net present value after five years at a discount rate of 15%. However,
Alternative #2 has a higher net present value after five years ($175,600 versus $156,400) and should
therefore be the alternative selected.
Reference: A Systematic Approach to Long-Term Capacity Decisions
Difficulty: Hard
Keywords: evaluating alternatives, net present value, pre-tax cash flow, discount rate
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Analytical Thinking
4.4 Tools for Capacity Planning
1) Waiting line models are often used for capacity planning.
Answer: TRUE
Reference: Tools for Capacity Planning
Difficulty: Moderate
Keywords: waiting line models, capacity planning
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
2) Which of the following descriptions about waiting line models is BEST?
1. A) They account for major events such as competitor actions.
2. B) They account for the random, independent behavior of many customers.
3. C) They assume that each branch can give the highest expected payoff.
4. D) They deal with the certainty and stability in demand.
Answer: B
Reference: Tools for Capacity Planning
Difficulty: Moderate
Keywords: waiting line model
Learning Outcome: Apply waiting-line theories and models
AACSB: Application of Knowledge
3) What information would managers use to choose the best cost-effective capacity to balance customer
service with the cost of adding capacity?
1. A) decision trees
2. B) economies of scale
3. C) capacity cushion
4. D) waiting line models
Answer: D
Reference: Tools for Capacity Planning
Difficulty: Moderate
Keywords: waiting line model
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
4) When future demand is uncertain and sequential decisions are involved in capacity planning, a manager
should use a:
1. A) waiting line model.
2. B) cash flow analysis.
3. C) decision tree.
4. D) gap analysis.
Answer: C
Reference: Tools for Capacity Planning
Difficulty: Moderate
Keywords: decision tree, capacity planning
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Application of Knowledge
Figure 4.1
5) A manager weighs three options for capacity cushion as depicted in Figure 4.1. If the dollar amounts
expressed in the figure are cash flows, which option is optimal?
1. A) large cushion
2. B) medium cushion
3. C) small cushion
4. D) Not enough information is given to select an option.
Answer: B
Reference: Tools for Capacity Planning
Difficulty: Moderate
Keywords: decision tree, capacity planning, cushion
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Analytical Thinking
6) A manager weighs three options for capacity cushion as depicted in Figure 4.1. If the dollar amounts
expressed in the figure are cash flows, what is the value of the optimal decision?
1. A) $11,700
2. B) $11,500
3. C) $12,300
4. D) $10,500
Answer: A
Reference: Tools for Capacity Planning
Difficulty: Moderate
Keywords: decision tree, capacity planning, cushion
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
7) A manager weighs three options for capacity cushion as depicted in Figure 4.1. If the dollar amounts
expressed in the figure are costs, what is the optimal decision?
1. A) large cushion
2. B) medium cushion
3. C) small cushion
4. D) Not enough information is given to select an option.
Answer: C
Reference: Tools for Capacity Planning
Difficulty: Moderate
Keywords: decision tree, capacity planning, cushion
Learning Outcome: Explain options for managing bottlenecks and managing capacity in service and
manufacturing processes.
AACSB: Analytical Thinking
8) A capacity decision in a call center, such as the number of customer service representatives to answer the
phone during a peak period, can be addressed using a(n) ________.
Answer: waiting-line (queuing) model
Reference: Tools for Capacity Planning
Difficulty: Easy
Keywords: waiting-line models, queuing
AACSB: Application of Knowledge
9) Extremely complex service capacity problems for which there are no optimizing equations should be
analyzed using ________.
Answer: simulation
Reference: Tools for Capacity Planning
Difficulty: Easy
Keywords: simulation
AACSB: Application of Knowledge
10) ________ are useful capacity analysis tools when the future is uncertain and capacity decisions can be
made in a sequential fashion.
Answer: Decision trees
Reference: Tools for Capacity Planning
Difficulty: Easy
Keywords: decision tree
AACSB: Application of Knowledge