Practice Problems: Chapter 7S, Capacity Planning



Practice Problems: Supplement 7, Capacity Planning

Problem 1:

The design capacity for engine repair in our company is 80 trucks/day. The effective capacity is 40 engines/day and the actual output is 36 engines/day. Calculate the utilization and efficiency of the operation. If the efficiency for next month is expected to be 82%, what is the expected output?

Problem 2:

Given: [pic]

[pic]

[pic]

Find the break-even point in $ and in units.

Problem 3:

Develop the break-even chart for Problem 2.

Problem 4:

Jack’s Grocery is manufacturing a “store brand” item that has a variable cost of $0.75 per unit and a selling price of $1.25 per unit. Fixed costs are $12,000. Current volume is 50,000 units. The Grocery can substantially improve the product quality by adding a new piece of equipment at an additional fixed cost of $5,000. Variable cost would increase to $1.00, but their volume should increase to 70,000 units due to the higher quality product. Should the company buy the new equipment?

Problem 5:

What are the break-even points ($ and units) for the two processes considered in Problem 4?

Problem 6:

Develop a break-even chart for Problem 4.

Problem 7:

Good News! You are going to receive $6,000 in each of the next 5 years for sale of used machinery. A bank is willing to lend you the present value of the money in the meantime at discount of 10% per year. How much cash do you receive now?

ANSWERS:

Problem 1:

[pic]

[pic]

[pic]

Problem 2:

[pic]

[pic]

Problem 3:

[pic]

Problem 4:

Profit = TR – TC

Option A: Stay as is:

[pic]

Option B: Add equipment:

[pic]

Therefore the company should continue as is with the present equipment as this returns a higher profit..

Problem 5:

Using current equipment:

[pic]

[pic]

Using the new equipment

[pic]

[pic]

Problem 6:

[pic]

Problem 7:

The net present value factor for 10% and 5 years is 3.79 [pic]

Therefore, the present value is: [pic]

The Bad News is you do have to pay back the loans!

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