# Operations Management – Chapter 5 Notes

The term capacity refers to the maximum quantity an operating unit can process over a given period. True or False?

True

Capacity decisions are usually one-time decisions; once they have been made, we know the limits of our operations. True or False?

False

Stating capacity in dollar amounts generally results in a consistent measure of capacity regardless of the actual units of measure. True or False?

False

Design capacity refers to the maximum output that can possibly be attained. True or False?

True

If the unit cost to buy something is less than the variable cost to make it, the decision to make or buy is based solely on the fixed costs. True or False?

False

Increasing productivity and quality will result in increased capacity. True or False?

True

Utilization is defined as the ratio of effective capacity to design capacity. True or False?

False

Increasing capacity just before a bottleneck operation will improve the output of the process. True or False?

False

An example of an external factor that influences effective capacity is government safety regulations. True or False?

True

Cost and competitive priorities reduce effective capacities. True or False?

False

Capacity increases are usually acquired in moderately large “chunks” rather than in smooth increments. True or False?

True

In cost-volume analysis, costs that vary directly with volume of output are referred to as fixed costs because they are a fixed percentage of output levels. True or False?

False

The break-even quantity can be determined by dividing the fixed costs by the difference between the revenue per unit and the variable cost per unit. True or False?

True

According to the reading on restaurant sourcing practices, only fast food restaurants are able to ‘bring’ in outsourced foods. True or False?

False

The greater the gap between current and desired capacity, the greater the opportunity for profit. True or False?

False

The current trend toward global operations has made capacity decisions much easier since we have the whole world in which to consider operations. True or False?

False

Capacity planning requires an analysis of needs; what kind, how much and when. True or False?

True

Waiting line analysis can be useful for capacity design, especially for service systems. True or False?

True

Capacity decisions often involve a long-term commitment of resources which, when implemented, are difficult or impossible to modify without major added costs. True or False?

True

Outsourcing some production is a means of supporting a constraint. True or False?

False

Outsourcing some production is a means of _________ a capacity constraint.

A. Identifying

B. Modifying

C. Supporting

D. Overcoming

E. Repeating

A. Identifying

B. Modifying

C. Supporting

D. Overcoming

E. Repeating

D. Overcoming

A basic question in capacity planning is:

A. what kind is needed

B. how much is needed

C. when is it needed

D. all of the above

E. none of the above

A. what kind is needed

B. how much is needed

C. when is it needed

D. all of the above

E. none of the above

D. all of the above

Which of these factors would not be subtracted from design capacity when calculating effective capacity?

A. personal time

B. maintenance

C. scrap

D. operating hours per day

E. all of the above would be subtracted in the calculation

A. personal time

B. maintenance

C. scrap

D. operating hours per day

E. all of the above would be subtracted in the calculation

E. all of the above would be subtracted in the calculation

A reason for the importance of capacity decisions is that capacity:

A. limits the rate of output possible

B. affects operating costs

C. is a major determinant of initial costs

D. is a long-term commitment of resources

E. all of the above

A. limits the rate of output possible

B. affects operating costs

C. is a major determinant of initial costs

D. is a long-term commitment of resources

E. all of the above

E. all of the above

Which of the following is the case where capacity is measured in terms of inputs?

A. hospital

B. theater

C. restaurant

D. all of the above

E. none of the above

A. hospital

B. theater

C. restaurant

D. all of the above

E. none of the above

D. all of the above

Unbalanced systems are evidenced by

A. Top heavy operations

B. Labor unrest

C. Bottleneck operations

D. Increasing capacities

E. Assembly lines

A. Top heavy operations

B. Labor unrest

C. Bottleneck operations

D. Increasing capacities

E. Assembly lines

C. Bottleneck operations

Maximum capacity refers to the upper limit of:

A. inventories

B. demand

C. supplies

D. rate of output

E. finances

A. inventories

B. demand

C. supplies

D. rate of output

E. finances

D. rate of output

The impact that a significant change in capacity will have on a key vendor is a:

A. supply chain factor

B. process limiting factor

C. internal factor

D. human resource factor

E. operational process factor

A. supply chain factor

B. process limiting factor

C. internal factor

D. human resource factor

E. operational process factor

A. supply chain factor

The maximum possible output given a product mix, scheduling difficulties, quality factors, and so on, is:

A. utilization

B. design capacity

C. efficiency

D. effective capacity

E. available capacity

A. utilization

B. design capacity

C. efficiency

D. effective capacity

E. available capacity

D. effective capacity

Efficiency is defined as the ratio of:

A. actual output to effective capacity

B. actual output to design capacity

C. design capacity to effective capacity

D. effective capacity to actual output

E. design capacity to actual output

A. actual output to effective capacity

B. actual output to design capacity

C. design capacity to effective capacity

D. effective capacity to actual output

E. design capacity to actual output

A. actual output to effective capacity

Utilization is defined as the ratio of:

A. actual output to effective capacity

B. actual output to design capacity

C. design capacity to effective capacity

D. effective capacity to actual output

E. design capacity to actual output

A. actual output to effective capacity

B. actual output to design capacity

C. design capacity to effective capacity

D. effective capacity to actual output

E. design capacity to actual output

B. actual output to design capacity

Which of the following is a factor that affects service capacity planning?

A. the need to be near customers

B. the inability to store services

C. the degree of volatility of demand

D. the customer’s willingness to wait

E. all of the above

A. the need to be near customers

B. the inability to store services

C. the degree of volatility of demand

D. the customer’s willingness to wait

E. all of the above

E. all of the above

Which of the following is a tactic that helps service capacity management?

A. pricing

B. promotions

C. discounts

D. advertising

E. all of the above

A. pricing

B. promotions

C. discounts

D. advertising

E. all of the above

E. all of the above

The ratio of actual output to effective capacity is:

A. design capacity

B. effective capacity

C. actual capacity

D. efficiency

E. utilization

A. design capacity

B. effective capacity

C. actual capacity

D. efficiency

E. utilization

D. efficiency

The ratio of actual output to design capacity is:

A. design capacity

B. effective capacity

C. actual capacity

D. efficiency

E. utilization

A. design capacity

B. effective capacity

C. actual capacity

D. efficiency

E. utilization

E. utilization

Given the following information, what would efficiency be?

Effective capacity = 80 units per day

Design capacity = 100 units per day

Utilization = 48%

A. 20%

B. 35%

C. 48%

D. 60%

E. 80%

Effective capacity = 80 units per day

Design capacity = 100 units per day

Utilization = 48%

A. 20%

B. 35%

C. 48%

D. 60%

E. 80%

D. 60%

Given the following information, what would efficiency be?

Effective capacity = 50 units per day

Design capacity = 100 units per day

Actual output = 30 units per day

A. 40%

B. 50%

C. 60%

D. 80%

E. 90%

Effective capacity = 50 units per day

Design capacity = 100 units per day

Actual output = 30 units per day

A. 40%

B. 50%

C. 60%

D. 80%

E. 90%

C. 60%

Given the following information, what would utilization be?

Effective capacity = 20 units per day

Design capacity = 60 units per day

Actual output = 15 units per day

A. 1/4

B. 1/3

C. 1/2

D. 3/4

E. none of these

Effective capacity = 20 units per day

Design capacity = 60 units per day

Actual output = 15 units per day

A. 1/4

B. 1/3

C. 1/2

D. 3/4

E. none of these

A. 1/4

Which of the following is not a strategy to manage service capacity?

A. hiring extra workers

B. backordering

C. pricing and promotion

D. part time workers

E. subcontracting

A. hiring extra workers

B. backordering

C. pricing and promotion

D. part time workers

E. subcontracting

B. backordering

Which of the following is not a determinant of effective capacity?

A. facilities

B. product mix

C. actual output

D. human factors

E. external factors

A. facilities

B. product mix

C. actual output

D. human factors

E. external factors

C. actual output

Capacity planning decisions have both long-term and short-term considerations. Which of the following statements are true?

(I) Long-term considerations relate to the overall level of capacity.

(II) Short-term considerations relate to the probable variations in capacity requirements.

(III) Short-term considerations determine the “effective capacity.”

A. Only one of the three statements is true.

B. I and II

C. II and III

D. I and III

E. All three statements are correct.

(I) Long-term considerations relate to the overall level of capacity.

(II) Short-term considerations relate to the probable variations in capacity requirements.

(III) Short-term considerations determine the “effective capacity.”

A. Only one of the three statements is true.

B. I and II

C. II and III

D. I and III

E. All three statements are correct.

B. I and II

Capacity in excess of expected demand that is intended to offset uncertainty is a:

A. margin protect

B. line balance

C. capacity cushion

D. timing bubble

E. none of the above

A. margin protect

B. line balance

C. capacity cushion

D. timing bubble

E. none of the above

C. capacity cushion

Short-term considerations in determining capacity requirements include:

A. demand trend

B. cyclical demand variations

C. seasonal demand variations

D. mission statements

E. new product development plans

A. demand trend

B. cyclical demand variations

C. seasonal demand variations

D. mission statements

E. new product development plans

C. seasonal demand variations

Which of the following is not a criterion for developing capacity alternatives?

A. design structured, rigid systems

B. take a big-picture approach to capacity changes

C. prepare to deal with capacity in “chunks”

D. attempt to smooth out capacity requirements

E. identify the optimal operating level

A. design structured, rigid systems

B. take a big-picture approach to capacity changes

C. prepare to deal with capacity in “chunks”

D. attempt to smooth out capacity requirements

E. identify the optimal operating level

A. design structured, rigid systems

Seasonal variations are often easier to deal with in capacity planning than random variations because seasonal variations tend to be:

A. smaller

B. larger

C. predictable

D. controllable

E. less frequent

A. smaller

B. larger

C. predictable

D. controllable

E. less frequent

C. predictable

Production units have an optimal rate of output where:

A. total costs are minimum

B. average unit costs are minimum

C. marginal costs are minimum

D. rate of output is maximum

E. total revenue is maximum

A. total costs are minimum

B. average unit costs are minimum

C. marginal costs are minimum

D. rate of output is maximum

E. total revenue is maximum

B. average unit costs are minimum

When the output is less than the optimal rate of output, the average unit cost will be:

A. lower

B. the same

C. higher

D. could be either higher or lower

E. could be either higher, lower or the same

A. lower

B. the same

C. higher

D. could be either higher or lower

E. could be either higher, lower or the same

C. higher

When buying component parts, risk does not include:

A. loss of control

B. vendor viability

C. interest rate fluctuations

D. need to disclose proprietary information

E. all are risk factors

A. loss of control

B. vendor viability

C. interest rate fluctuations

D. need to disclose proprietary information

E. all are risk factors

C. interest rate fluctuations

At the break-even point:

A. output equals capacity

B. total cost equals total revenue

C. total cost equals profit

D. variable cost equals fixed cost

E. variable cost equals total revenue

A. output equals capacity

B. total cost equals total revenue

C. total cost equals profit

D. variable cost equals fixed cost

E. variable cost equals total revenue

B. total cost equals total revenue

What is the break-even quantity for the following situation?

FC = $1,200 per week

VC = $2 per unit

Rev = $6 per unit

A. 100

B. 200

C. 600

D. 1,200

E. 300

FC = $1,200 per week

VC = $2 per unit

Rev = $6 per unit

A. 100

B. 200

C. 600

D. 1,200

E. 300

E. 300

An alternative will have fixed costs of $10,000 per month, variable costs of $50 per unit, and revenue of $70 per unit. The break-even point volume is:

A. 100

B. 2,000

C. 500

D. 1,000

E. none of these

A. 100

B. 2,000

C. 500

D. 1,000

E. none of these

C. 500

For fixed costs of $2,000, revenue per unit of $2, and variable cost per unit of $1.60, the break-even quantity is:

A. 1,000

B. 1,250

C. 2,250

D. 5,000

E. none of these

A. 1,000

B. 1,250

C. 2,250

D. 5,000

E. none of these

D. 5,000

Which of the following are assumptions of the break-even model?

I. Only one product is involved.

II. Everything that is produced can be sold.

III. The revenue per unit will be the same regardless of volume.

A. I only

B. I and II only

C. II only

D. II and III only

E. I, II and III

I. Only one product is involved.

II. Everything that is produced can be sold.

III. The revenue per unit will be the same regardless of volume.

A. I only

B. I and II only

C. II only

D. II and III only

E. I, II and III

E. I, II and III

If the output rate is increased but the average unit costs also increase we are experiencing:

A. market share erosion.

B. economies of scale.

C. diseconomies of scale.

D. value added accounting.

E. step-function scale up.

A. market share erosion.

B. economies of scale.

C. diseconomies of scale.

D. value added accounting.

E. step-function scale up.

C. diseconomies of scale.

The method of financial analysis which focuses on the length of time it takes to recover the initial cost of an investment is:

A. payback

B. net present value

C. internal rate of return

D. queuing

E. cost-volume

A. payback

B. net present value

C. internal rate of return

D. queuing

E. cost-volume

A. payback

When determining the timing and degree of capacity change, one can use the approach of:

A. lead time flexibility strategy

B. expand early strategy

C. wait-and-see strategy

D. backordering

E. delayed differentiation

A. lead time flexibility strategy

B. expand early strategy

C. wait-and-see strategy

D. backordering

E. delayed differentiation

B. expand early strategy

The method of financial analysis which results in an equivalent interest rate is:

A. payback

B. net present value

C. internal rate of return

D. queuing

E. cost-volume

A. payback

B. net present value

C. internal rate of return

D. queuing

E. cost-volume

C. internal rate of return

An investment proposal will have annual fixed costs of $60,000, variable costs of $35 per unit of output, and revenue of $55 per unit of output.

(A) Determine the break-even quantity

(B) What volume of output will be necessary for an annual profit of $60,000?

(A) Determine the break-even quantity

(B) What volume of output will be necessary for an annual profit of $60,000?

A. 3,000

B. 6,000

B. 6,000

A firm is considering three capacity alternatives: A, B, and C. Alternative A would have an annual fixed cost of $100,000 and variable costs of $22 per unit. Alternative B would have annual fixed costs of $120,000 and variable costs of $20 per unit. Alternative C would have fixed costs of $80,000 and variable costs of $30 per unit. Revenue is expected to be $50 per unit.

(A) Which alternative has the lowest break-even quantity?

(B) Which alternative will produce the highest profits for an annual output of 10,000 units?

(C) Which alternative would require the lowest volume of output to generate an annual profit of $50,000?

(A) Which alternative has the lowest break-even quantity?

(B) Which alternative will produce the highest profits for an annual output of 10,000 units?

(C) Which alternative would require the lowest volume of output to generate an annual profit of $50,000?

A. 3,572 4,000 4,000

B. 180,000 180,000 120,000

C. 5,358 5,667 6,500

B. 180,000 180,000 120,000

C. 5,358 5,667 6,500

A small business owner is contemplating the addition of another product line. Capacity increases and equipment will result in an increase in annual fixed costs of $50,000. Variable costs will be $25 per unit.

A) What unit-selling price must the owner obtain to break-even on a volume of 2,500 units a year?

B) Because of market conditions, the owner feels a revenue of $47 is preferred to the value determined in part A. What volume of output will be required to achieve a profit of $16,000 using this revenue?

A) What unit-selling price must the owner obtain to break-even on a volume of 2,500 units a year?

B) Because of market conditions, the owner feels a revenue of $47 is preferred to the value determined in part A. What volume of output will be required to achieve a profit of $16,000 using this revenue?

A. 45

B. 3,000

B. 3,000

The efficiency of a productive unit is 60%. The unit produces an average of 20 forklift trucks per day. Determine the effective capacity of the unit.

33.33

The utilization of a machine is 50%. The machine has a design capacity of 70 units per hour and an effective capacity of 60 units per hour. Find the efficiency of the machine.

58.33

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