98 SUPPLEMENT 7 C A PA C I T Y P L A N N I N G

S U P P L E M E N T

Capacity Planning

DISCUSSION QUESTIONS 4. As   the   actual   output   rises,   how   does   this   affect   both   the
utilization and efficiency?
1. Design   capacity   is   the   theoretical   maximum   output   of   a
Both utilization and efficiency rise.
system in a given period. Effective capacity is the capacity a firm
can expect to achieve given its current product mix, methods of ACTIVE MODEL S7.2: Breakeven Analysis
scheduling, maintenance, and standards of quality.
1. Use the scrollbars to determine what happens to the breakeven
2. The fundamental assumptions of break­even analysis are point as the fixed costs increase? The variable costs increase? The
 Fixed costs do not vary with volume selling price increases?
 Unit variable costs do not vary with volume If the fixed or variable costs increase then the breakeven
 Unit revenues do not vary with volume point  increases,   while if  the selling  price increases  then the
3. The manager obtains data for use in break­even analysis from breakeven point decreases.
 Cost data: industrial engineering and accounting 2. What is the percentage increase (over 5,714) to the breakeven
 Demand and revenue data: marketing point if the fixed costs increase by 10% to $11,000? If the variable
costs increase by 10% to $2.48? If the price per unit increases by
4. Revenue   data,   when   plotted,   do   not   fall   on   a   straight   line
10% to $4.40?
because of volume discounts, etc.
If the fixed costs rise by 10% the break even point rises by
5. Lagging is preferred when short­term options like overtime 10%. In this case if the variable costs rise by 10% then the
and   subcontracting   are   relatively   low   cost   and/or   easy   to   use. BEP rises by 15%. If the price per unit increases by 10% then
Leading is preferred when a firm cannot afford to lose customers the breakeven point FALLS by 19%.
for lack of product availability, and overtime, etc., are not available.
3. In  order  to  cut  the  breakeven  point  in  half,   by  how  much
6. NPV   determines   the   discounted   or   time   value   of   money, would   the   FIXED   costs   have   to   decrease?   The   variable   costs?
comparing cost and income streams over periods of time. Process How much would the selling price have to increase?
decisions may incur much of their expense early in the life of the
equipment, but the stream of revenues may follow for decades. Fixed costs – $5,000; Variable costs by $1.75 from $2.25
NPV is the appropriate analytical tool for that situation. to $.50; The selling price would need to increase by the same
$1.75.
7. Effective capacity is the capacity a firm can expect to achieve
given   its   current   product   mix,   methods   of   scheduling,
maintenance, and standards of quality.
END-OF-CHAPTER PROBLEMS
8. Efficiency is the actual output as a percent of effective capacity. actual output 6,000
S7.1    Utilization = = = 0.857  85.7%
Efficiency = actual output/effective capacity design capacity 7,000
9. Expected output = effective capacity  efficiency actual output 4,500
S7.2    Efficiency = = = 0.692 or 69.2%
effective capacity 6,500
ACTIVE MODEL EXERCISES
S7.3     Expected output = (effective capacity)  (efficiency) 
ACTIVE MODEL S7.1: Productivity
 (6,500)(.88)  5,720
1. Due to an anticipated decrease in demand the firm is considering
dropping one of its shifts. What will be the capacity if they do so? actual (expected) output 800
S7.4     Efficiency = = = 88.9%
134,400 effective capacity 900
2. Another option would be to maintain 3 shifts but only work S7.5
on weekdays. What will be the capacity if they select this option?
144,000 actual output 400
Efficiency =   or  0.80 =
3. As the effective capacity rises, how does this affect both the effective capacity effective capacity
utilization and efficiency. 400
Utilization is unaffected but the efficiency drops. Thus, effective capacity =  500
0.80
99 SUPPLEMENT 7 C A PA C I T Y P L A N N I N G

S7.6 Expected output = (effective capacity)  (efficiency) S7.10 In 2006, Eye Associates has 8 machines @ 2500. In year
= 90  0.90 = 81 chairs 2011 it needs capacity of 20,100.
S7.7 Actual (expected) output = hours  efficiency (a) Therefore, if it adds 3,000 to capacity in 2006, total
= 8 hr  5 days  2 shifts  4 machines  0.95 capacity   in   2011   will   be   23,000   lenses,   more   than
= 320  0.95 = 304 hrs adequate. Exceeds by 2,900.
S7.8 Design: 93,600  0.95 = 88,920 (b) If it buys the standard machine in 2006, its capacity in
Fabrication: 156,000  1.03 = 160,680 2011 will be 22,500 lenses, still more than adequate;
Finishing: 62,400  1.05 = 65,520 the smaller machine will suffice. Exceeds by 2,400.
S7.9 S7.11 Where:
Design Capacity = 2,000 students
Year X Y X2 XY
1996 1 15.00 1 15.00 Effective Capacity = 1,500 students
1997 2 15.50 4 31.00 Actual Output = 1,450 students
1998 3 16.25 9 48.75
Therefore:
1999 4 16.75 16 67.00
2000 5 16.90 25 84.50 actual output 1,450
Utilization    72.5%
2001 6 17.24 36 103.44 design capacity 2,000
2002 7 17.50 49 122.50
2003 8 17.30 64 138.40 actual output 1,450
Efficiency    96.7%
2004 9 17.75 81 159.75 effective capacity 1,500
2005 10 18.10 100 181.00
X 5 Y 168.2 X 2 38 XY 951.3 S7.12 (a) Proposal A breakeven in units is:
= 5 = 9 = 5 = 4 Fixed cost $50,000 $50,000
   6,250 units
SP - VC 20 - 12 8
Regression Output
(b) Proposal B breakeven in units is:
Constant 15.11
X Coefficient 0.312 Fixed cost $70,000 $70,000
   7,000 units
Std err of Y est 0.301 SP - VC 20 - 10 10
R squared 0.916
8 S7.13 (a) Proposal A breakeven in dollars is:
No. of observations 10 Fixed cost $50,000 + $10,000 $60,000
Degrees of freedom 8    $150,000
Std err of coef. 0.033
1 - VC
SP
1 - 12 0.40
20
(b) Proposal B breakeven in dollars is:
x
X  5.5
n Fixed cost $70,000 + $10,000
BEP$ = =
y 1 - VC 1 - 10
Y  16.829 SP 20
n
25.745 $80,000
b  0.312    $160,000 
82 0.50
a  16.829 - 0.312 � 5.5  15.11 S7.14 Set Proposal A = Proposal B
Year 2006 = a + bx11, therefore (SPA - VCA ) X A - FA  (SPB - VCB ) XB - FB
15.11 + 0.312  11 = 15.11 + 3.43 = 18.54, (20 - 12)X - 50,000  (20 - 10)X - 70,000
or 18,540 lenses (8)X - 50,000  (10)X - 70,000
Year 2008 = a + bx13, therefore (8)X + 20,000  (10)X
15.11 + 0.312  13 = 15.11 + 4.056 = 19.17, 20,000  10 X - 8 X
or 19,160 lenses 20,000  2 X
Year 2010 = a + bx15, therefore 10,000  X

15.11 + 0.312  15 = 15.11 + 4.68 = 19.79, 20,000
S7.15   (a)   BEPA   1,667 pizzas;
or 19,790 lenses 14 - 2
(a) 2006 capacity needs = 18.54 thousand 30,000
                  BEPB   2,353 pizzas
2008 capacity needs = 19.17 thousand 14 - 1.25
2010 capacity needs = 19.79 thousand (b   &   c)   For   both   quantities,   oven   A   is   slightly   more
(b) Requirements in 2010 are for 19.79(  1000) lenses. profitable (but oven B is catching up).
Therefore,   Eye   Associates   will   need   8   machines
(19,790/2,500 = 7.9, round up to 8).
 SUPPLEMENT 7 C A PA C I T Y P L A N N I N G 100

S7.15  (cont’d)

Oven A Oven B Unit Sales of

Fixed cost $20,000.00 $30,000.00 Profit A –  Profit B –
Revenue $14.00 $14.00 $9,000  $88,000 $84,750
Variable cost $2.00 $1.25 $12,000  $124,000 $123,000

  Breakeven is given by:
(d)  20,000 + 2Xa  = 30,000 + 1.25Xb
                                 .75X = 10,000 F 325,000 325,000
(a)  BEPx     32,500 units
                                      X = 13,333 pizzas P - V 30 - 20 10
S7.16 Given: F 325,000 325,000
(b)  BEP$     $975,000
 Price ( P) = $8 unit 1 - VP 1 - 20
30
1 - 0.667
Variable cost (V ) = $4 unit  S7.20 Option A: Stay as is
Fixed cost (F ) = $50,000   Option B: add new equipment
  (a)  Breakeven in units is given by: Units  ( Price - VC ) - FC = Profit
F 50,000 50,000 Profit A = 30,000  ( 1.00 - 0.50 ) - 14,000
BEPx     12,500 units
P-V 8-4 4 = $1,000
  (b)  Breakeven in dollars is given by: Profit B = 50,000  ( 1.00 - 0.60 ) - 20,000
F 50,000 50,000 = $0
BEP$     $100,000 
1 - VP 1 - 84 1 - 0.50 Therefore, the company should stay with the present equipment.

  (c)  Profit is given by: S7.21 Option A: Stay as is
Profit  Volume �Contribution - Fixed cost    Option B: Add new equipment, raise selling price

 100,000 �( 8 - 4 ) - 50,000 Units �( Price - VC ) - FC = Profit

 400,000 - 50,000  $350,000 Profit A = 30,000 �( 1.00 - 0.50 ) - 14,000

= $1,000
S7.17 Given:
Profit B = 45,000 �( 1.10 - 0.60 ) - 20,000
Price ( P ) = $0.05 unit
Variable cost (V ) = $0.01 unit  = $2,500

Fixed cost ( F ) = $15,000 Therefore, the company should choose option B: add the

new equipment and raise the selling price.
  Breakeven is given by:
S7.22 Where:
F 15,000 15,000   FC = $37,500 VC = $1.75     P = 2.50
BEP$     $18,750
1 - VP 1 - 0.05
0.01 1 - 0.2   (a)  Break­even quantity for the manual process in units:
F 15,000 15,000 F 37,500
BEPx       50,000 bags
P - V 0.05 - 0.01 0.04 P - V 2.50 - 1.75
 375,000 copies   (b) Revenue at the break­even quantity:
50,000  2.50  $125,000 and 
S7.18 Given:
37,500
 Price ( P ) = $30 unit BEP$ 
V
Variable cost (V ) = $20 unit  1-
P
Fixed cost ( F ) = $250,000 37,500
  $125,000
  Breakeven is given by: 1.75
1-
F 250,000 250,000 2.50
BEP$     $750,000
1 - VP 20
1 - 30 1 - 0.667 (c) Break­even   quantity   for   the   mechanized   process:
where: F = 75,000     P = 1.25
F 250,000 250,000 75,000
BEPx     25,000 units BEPu   60,000 bags
P -V 30 - 20 10 2.50 - 1.25
S7.19 Given: (d) Revenue   at   the   break­even   quantity   for   the   mecha­
 Price (P)  $30 unit nized process:
Variable cost (V )  $20 unit 60,000 �2.50 = $150,000 
Fixed cost (F )  $250,000 + $75,000 75,000
and  = $150,000
1.25
 $325,000 1-
2.50
101 SUPPLEMENT 7 C A PA C I T Y P L A N N I N G

(e) Monthly profit or loss of the manual process if they S7.24 (a)  Break­even volume:
expect to sell 60,000 bags of lettuce per month:
Profit   =   2.50(60,000)   –   37,500   –   1.75(60,000) Total fixed cost =     1800 rent, utilities, etc.
 = $7,500 + 2000  entertainment
=
(f) Monthly profit or loss of the mechanized process if    3800
they expect to sell 60,000 bags of lettuce per month
2.50(60,000) – 75,000 – 1.25(60,000) Selling Percent of
= 0.0 (breakeven) Price Volume Revenue Total
Revenue
(g) They should be indifferent to the process selected at
75,000 bags. Drinks 1.50 30000 45000 0.153
Meals 10.00 10000 100000 0.339
37,500 + 1.75X  75,000 + 1.25 X
Desserts/etc. 2.50 10000 25000 0.085
37,500  .5 X Sandwiches 6.25 20000 125000 0.423
75,000  X 295000 1.00
0
(h) The manual process be preferred over the mechanized
process below 75,000 bags. The mechanized process
be preferred over the manual process above 75,000 P V V/P 1–V/P Wi 1–
bags. (V/P)Wi
Drinks 1.50 0.75 0.50 0.50 0.153 0.077
Meals 10.00 5.00 0.50 0.50 0.339 0.170
Desserts 2.50 1.00 0.40 0.60 0.085 0.051
Lunch 6.25 3.25 0.52 0.48 0.423 0.203
1.00 0.501
0

F 3800
BEP$    $7,584.83
  0.501
 1 - VPi  Wi
 i 
(b)  Number of meals per day at breakeven = 9
Fraction BE Units BE
S7.23 (a) Yes, Selling of Total Dollar per Units
Total profit now: Price Revenue Volume Month per
[40,000  (2.00 – 0.75)] – $20,000 = $30,000 Day
Total profit with new machine: Drinks 1.50 0.153 1160.48 774 26
[50,000  (2.00 – .50)] – $25,000 = $50,000 Meals 10.00 0.339 2571.26 258 9
(b) The equipment choice changes at 20,000 units. Desserts/et 2.50 0.085 644.71 258 8
c.
.75x + 20,000  .50 x + 25,000
Sandwiches 6.25 0.424 3208.28 514 18
.25x  5,000
S7.25 (a)  Break­even volume:
x  20,000 units
Total fixed cost =     1800  rent, utilities, etc.
+ 2000 entertainment
=  
   3800
Selling Percent of
Price Volume Revenue Total
Revenue
Drinks 1.50 30000 45000 0.153
Meals 10.00 10000 100000 0.339
Desserts/et 2.50 10000 25000 0.085
c.
Sandwiches 6.25 20000 125000 0.424
29500 1.00
0 0

Total Variable Total

(c) At   a   volume   of   15,000   units,   the   current   process Food Cost Cost Factor* Variable
should be used. Cost
Drinks 0.75 1.10 0.83
 SUPPLEMENT 7 C A PA C I T Y P L A N N I N G 102

Meals 5.00 1.43 7.15

Desserts/etc. 1.00 1.10 1.10
Lunch/Sandwich 3.25 1.43 4.65
es
* The total variable cost factor for meals and sandwiches is developed as:
 1.00 food cost
 0.33 labor, at two­thirds of food cost
0.10
variable expenses at 10% of food costs
1.43
 Total sales at breakeven
(b)  No. of wine servings �25% of sales
at breakeven  =
          Price of wine
986.19 �0.25
103 SUPPLEMENT 7 C A PA C I T Y P L A N N I N G = = 140.9 servings
$1.75

The total variable cost factor for drinks and desserts/wines is developed as:
1.00 food cost
0.10 variable expenses at 10% of costs
1.10 total variable expense

P V V/P 1–V/P Wi [1–

(V/P)Wi
Drinks  1.50 0.83 0.55 0.45 0.153 0.069 S7.27 (a)
Meals 10.00 7.15 0.72 0.28 0.339 0.095
Dessert  2.50 1.10 0.44 0.56 0.085 0.048
s
Lunch  6.25 4.65 0.74 0.26 0.423 0.110
1.000 0.322

F 3800
BEP$    $11,801.24
0.322
 1 - Vi  Wi
 Pi 

Selling Fraction of Dollar

Price Total Volume BEP Units
Revenue
Drinks 1.50 0.153 1805.59 1204
Meals 10.00 0.339 4000.62   401
Desserts/Win 2.50 0.085 1003.11   402 (b) Branch B which represents Option B­Modernize 2nd
e floor, has the highest expected value, $74,000.
Lunch/
Sandwiche 6.25 0.424 5003.73  810 S7.28
s
(b) Monthly breakeven, to include a profit of $35,000 per
year

Total  Fixed Cost =     1800 rent, utilities, etc.

   + 2000 entertainment
+ 2917 (35,000 /12) profit
=
   6717
F 6717
BEP$    $20,860.25
 V 0.322
 1 - Pi  Wi
 i 
Selling Fraction of Dollar
Price Total Volume BEP Units
Revenue Prefer   to   build   a   large   line.   Large   line   has   a   payoff   of
Drinks 1.50 0.153 3191.62 2128 $100,000. Small line has a payoff of $66,666 + 0 = $66,666.
Meals 10.00 0.339 7071.62 708
Desserts/Win 2.50 0.085 1773.12 710
e
Lunch/
Sandwiche 6.25 0.424 8844.75 1516
s

S7.26 (a)   Break­even volume, where total fixed cost = labor  
(at $250) + booth rental (at 5  $50) = $500.

Estimated Contributio
Selling Variable Var. Cost Total Percent n
Item Price Cost Factor (%) Var. Cost 1 Revenue Weighted
-(vc/sp) Revenue
Soft Drinks 1.00 0.65 1.1 0.715 0.285 0.25 0.071
Wine 1.75 0.95 1.1 1.045 0.403 0.25 0.101
Coffee 1.00 0.30 1.1 0.330 0.670 0.30 0.201
Candy 1.00 0.30 1.1 0.330 0.670 0.20 0.134
Totals 1.0 0.50
0 7
Breakeven = TFC/wt. contribution = 500/0.507 = $986.19
 SUPPLEMENT 7 C A PA C I T Y P L A N N I N G 104

S7.29 * NPV factor from Table S7.1.
Initial investment = $75,000 NPV   for   Machine   A   is   –$22,988;   NPV   for   Machine   B   is
Salvage value = $45,000 – $27,026. Therefore, Machine A should be recommended.
Five­year return = $15,000 S7.34
Cost of capital = 12%
Expense Three Small Two Large
NPV annuity factor  5 years @ 12% = 3.605 Ovens Ovens
Present value = 3.605  15,000 = $54,075
Original cost 3750 5000
Present value of salvage: 0.567  45,000 = $25,515 Excess labor per 750 0
Net present value = 54,075 + 25,515 – 75,000 = $4,590 year
S7.30 Maintenance per 750 400
year
Initial investment = $65,000
Salvage value 750 1000
Eight­year return = $16,000 per year
Cost of capital = 10%
NPV annuity factor  8 years @ 10% = 5.33 Three Small Ovens
Year NPV Factor* NPV
Present value = 5.33  $16000 = $85,280
Net present value = $85,280 – $65,000 = $20,280 Now Expense 3750 1.000 –3750
1 Expense 1500 0.877 –1316
S7.31 2 Expense 1500 0.769 –1154
F 2000 2000 3 Expense 1500 0.675 –1013
P    $1,544.40 4 Expense 1500 0.592 –888
(1 + i) N (1 + 0.09)3 1.2950
5 Expense 1500 0.519 –779
or from Table S7.1 –8900
5 Salvage 750 0.519 +389
NPV = F  PVF9%, 3 = 2000 = 0.772 = $1,544
revenue
S7.32 –8511

F 5600 5600 * NPV factor from Table S7.1.

P N
 15
  $1,765.35
(1 + i) (1.08) 3.17
Two Large Ovens
or from Table S7.1 Year NPV Factor* NPV
NPV = F  PVF8%, 15 = 5600  0.315 = $1,764 Now Expense 5000 1.000 –5000
1 Expense 400 0.877 –351
S7.33 2 Expense 400 0.769 –308
Expense Machine A Machine B 3 Expense 400 0.675 –270
Original cost 10000 20000 4 Expense 400 0.592 –237
Labor per year 2000 4000 5 Expense 400 0.519 –208
Maintenance per year 4000 1000 –6374
Salvage value 2000 7000 5 Salvage 1000 0.519 +519
revenue
–5855
Machine A
Year NPV Factor* NPV * NPV factor from Table S7.1.

Now Expense 10000 1.000 –10000 (a) NPV of the three small ovens = –$8,511; NPV of the

1 Expense 6000 0.893 –5358 two   large   ovens   =   –$5,855.   Therefore,   you   should
2 Expense 6000 0.797 –4782 recommend that the firm purchase the two large ovens.
3 Expense 6000 0.712 –4272 (b) The basic assumptions made with regard to the ovens
–24412
are:
3 Salvage 2000 0.712 +1424
 The ovens are of equal quality
revenue
 The ovens are of equivalent production capacity
–22988
* NPV factor from Table S7.1. (c) The   basic   assumptions   made   with   regard   to
methodology are:
Machine B  Future interest rates are known
Year NPV Factor* NPV  Payments are made at the end of each time period
Now Expense 20000 1.000 –20000
1 Expense 5000 0.893 –4465
2 Expense 5000 0.797 –3985
3 Expense 5000 0.712 –3560
–32010
3 Salvage 7000 0.712 +4984
revenue
–27026
105 SUPPLEMENT 7 C A PA C I T Y P L A N N I N G

S7.35 S7.39 (a) Proposal A: Profit at 8,500 units
F 300 Profit = (SP - VC)X - F  
(a)  BEPx1    100 crepes
P�V 4� 1 @ 8,500 for Proposal A: 
F2 0 0 (20 - 12)8,500 - 50,000 = 18,000 
(b)  BEPx 2    0
P �V2 4� (1+1.5) 1.5
@ 8,500 for Proposal B: 
If fixed costs are zero, and V < P, then profitable from start (20 - 10)8,500 - 70,000 = 15,000 
(c,d) Stand: Profit1 = P(BEP) - F + x (BEP) Proposal A is best.
= 4(350) - (300) + (1  350) = $750  (b) Proposal B: Profit at 15,000 units
(better option)
@ 15,000 units for Proposal A: 
Portable: Profit2 = P(BEP) - F + x (BEP)
= 4(350) - (0) + (2.5  350) = $525 (20 - 12)15,000 - 50,000 = $70,000 
F �F 300 � 0 @ 15,000 units for Proposal B: 
(e)  BEP1vs2  1 2   200
V2 �V1 2.5 �
 1 (20 - 10)15,000 - 70,000 = $80,000 
 So if BEPx < 200, Portable Proposal B is best.
 If BEPx > 200, Stand
S7.40 Investment A net income, using Table S7.2
Demand would have to be different by 150 (i.e. demand would  19000   PVF9%, 6  – 61,000 = 19,000  4.486 – 61,000
have to drop from 350 to 200). = $24,234
Investment B Net Income
Year NPV NPV
INTERNET HOMEWORK PROBLEMS Factor*
Solutions   to   problems   on   our   companion   web   site   home   page
Now Expense 74,000 1.000 –74,000
(www.prenhall.com/heizer).
1 Revenue 19,000 0.917 +17,42
S7.36 (a) Proposal A breakeven in units is: 3
Fixed cost 50,000 50,000 2 Revenue 20,000 0.842 +16,84
   6,250 units
SP - VC 20 - 12 8 0
3 Revenue 21,000 0.772 +16,21
(b) Proposal B breakeven in units is:
2
Fixed cost 70,000 70,000
   7,000 units 4 Revenue 22,000 0.708 +15,57
SP - VC 20 - 10 10 6
S7.37 (a) Proposal A breakeven in dollars is: 5 Revenue 21,000 0.650 +13,65
Fixed cost 50,000 50,000 0
   $125,000 6 Revenue 20,000 0.596 +11,92
1 - VC 1 - 12 0.40
SP 20 0
7 Revenue 11,000 0.547 +6,017
(b) Proposal B breakeven in dollars is:
23,638
Fixed cost 70,000 70,000
BEP$     $140,000
1 - VC 1 - 10 0.50 * From Table S7.1
SP 20
Therefore, Investment A, with a payoff of $24,234, would be pre­
S7.38 Set Proposal A = Proposal B; Solve for units ferred over Investment B, with a payoff of $23,638.
(SPA - VC A ) X A - FA  (SPB - VCB ) XB - FB
(20 - 12)X - 50,000  (20 - 10)X - 70,000
(8)X - 50,000  (10)X - 70,000
(8)X + 20,000  (10)X
20,000  10 X - 8 X
20,000  2 X
10,000  X
 SUPPLEMENT 7 C A PA C I T Y P L A N N I N G 106

S7.41 Initial investment = $20,000
Cash Flows
NPV Cash Flow 1 Cash Flow 2 Cash Flow 3
Year Factor* Cash P Cash P Cash P
1 0.909 $1,000 $909 $7,000 $6,363 $10,000 $9,090
2 0.826 1,000 826 6,000 4,956 5,000 4,130
3 0.751 3,000 2,253 5,000 3,755 3,000 2,253
4 0.683 15,000 10,245 4,000 2,732 2,000 1,366
5 0.621 3,000 1,863 4,000 2,484 1,000 621
6 0.564 1,000 564 4,000 2,256 1,000 564
7 0.513 — — 4,000 2,052 1,000 513
8 0.467 1,000 467 2,000 934 — —
9 0.424 — — — — 1,000 425
$17,12 $25,532 $18,96
7 2

*The NPV from investment 2 is highest, at $5,532 (after initial investment of $20,000 is subtracted).

S7.42 At 11 percent, the net present value is –$7,677.89. At 4
percent, the net present value is $5,378.54. They should purchase
at 4 percent but not at 11 percent.

Vinyl Siding Machine Solution at 11%

PV Factor PV
Inflow Outflow at 11% PV Inflow PV Outflow (Inflow–Outflow)
Period 0 0 70,000 1 0 70,000 –70,000
Period 1 20,000 0 0.9009 18,018.02 0 18,018.02
Period 2 15,000 0 0.8116 12,174.34 0 12,174.34
Period 3 15,000 0 0.7312 10,967.87 0 10,967.87
Period 4 15,000 0 0.6587 9,880.965 0 9,880.965
Period 5 10,000 0 0.5935 5,934.513 0 5,934.513
Period 6 10,000 0 0.5346 5,346.409 0   5,346.409
Total 85,00 70,00 62,322.11 70,00 –
0 0 0 7,677.89

Vinyl Siding Machine Solution at 4%

PV Factor PV
Inflow Outflow at 4% PV Inflow PV Outflow (Inflow–Outflow)
Period 0 0 70,000 1 0 70,000 –70,000
Period 1 20,000 0 0.9615 19,230.77 0 19,230.77
Period 2 15,000 0 0.9246 13,868.34 0 13,868.34
Period 3 15,000 0 0.889 13,334.95 0 13,334.95
Period 4 15,000 0 0.8548 12,822.06 0 12,822.06
Period 5 10,000 0 0.8219   8,219.271 0   8,219.271
Period 6 10,000 0 0.7903   7,903.146 0   7,903.146
Total 85,000 70,00 75,378.54 70,00 5,378.53
0
S7.43 The net present value of the receipts is $89,711.58. 0 9

PV Factor
Inflow Outflow at 6% Present value
Period 0 0 1 0 0
Period 1 50,000 0 0.9434 47,169.81
Period 2 30,000 0 0.89 26,699.89
Period 3 0 0 0.8396 0
Period 4 20,000 0 0.7921 15,841.87
Total 100,00 0 89,711.5
0 8
107 SUPPLEMENT 7 C A PA C I T Y P L A N N I N G

S7.44 Machine A’s NPV is $81,323.16; machine B’s NPV is
$85,982.66. Machine B has the higher NPV. The lower annual
returns are more than offset by a lower initial cost and by the  
salvage value.

Milling PV Factor PV
Machine A Inflow Outflow at 7% PV Inflow PV Outflow (Inflow–Outflow)
Period 0 0 300,000 1 0 300,000 –300,000
Period 1 80,000 0 0.9346 74,766.35 0 74,766.35
Period 2 80,000 0 0.8734 69,875.09 0 69,875.09
Period 3 80,000 0 0.8163 65,303.83 0 65,303.83
Period 4 80,000 0 0.7629 61,031.62 0 61,031.62
Period 5 80,000 0 0.713 57,038.89 0 57,038.89
Period 6 80,000 0 0.6663 53,307.38 0 53,307.38
Total 480,00 300,00 381,323.2 300,00 81,323.1
0 0 0 0 6

Milling PV Factor PV
Machine Inflow Outflow at 7% PV Inflow PV Outflow (Inflow–Outflow)
B
Period 0 0 220,000 1 0 220,000 –220,000
Period 1 60,000 0 0.9346 56,074.77 0 56,074.77
Period 2 60,000 0 0.8734 52,406.32 0 52,406.32
Period 3 60,000 0 0.8163 48,977.88 0 48,977.88
Period 4 60,000 0 0.7629 45,773.71 0 45,773.71
Period 5 60,000 0 0.713 42,779.17 0 42,779.17
Period 6 90,000 0 0.6663 59,970.80 0 59,970.8
Total 390,00 220,000 305,982.70 220,00 85,982.66
S7.45
2. What kind of major changes can take place in APH’s demand
PV Factor
forecast   that   would   leave   the   hospital   with   an   underutilized  
Inflow Outflow at 6% Present value
facility (namely what are the risks connected with this capacity
Period 0 0 1 0 0 decision)?
Period 1 20,000 0 0.9434 18,867.92 a) Demand   will   not   continue   to   grow   dramatically.   The
Period 2 0 0 0.89 0 hospital believes that the new building will attract new
Period 3 30,000 0 0.8396 25,188.58 OB/GYN   doctors   to   deliver   there.   The   other   major
Period 4 50,000 0 0.7921 39,604.68 hospital chain in Orlando, Florida Hospital, has also just
Total 100,00 0 83,661.1 announced   a   major   expansion.   This   may   flood   the
0 9 hospital bed market in the short run.
b) The population boom in Central Florida could abate with
VIDEO CASE STUDY rising housing prices that are discouraging future growth.
CAPACITY PLANNING AT ARNOLD PALMER  c) There are always unforeseen disasters in medicine that
HOSPITAL could   damage   the   hospital’s   sterling   reputation   (e.g.,
lawsuits, drop in quality).
The Arnold Palmer Hospital video for this case is available on the
video cassette/DVD from Prentice Hall that accompanies this text. d) There is a nursing shortage that could create a staffing
(Its   running   time   is   9   minutes.)   Also   note   that   the   Global bottleneck   if   not   corrected.   Recently,   the   two   major
Company Profile in Chapter 6 highlights this hospital. hospital chains in Central Florida got into a bidding war
in attempts to recruit each other’s nurses.
1. Given the discussion in the text, what approach is being taken
by APH toward matching capacity to demand?
Referring   to   text   Figure   S7.4,   Arnold   Palmer   Hospital’s
capacity first lagged demand (part c), and now is leading demand
with   incremental   expansion   (part   a).   The   new   building   will
provide sufficient capacity for several years. The top 2 floors (left
unfinished for additional beds) and operating rooms (on the 4th
floor, available for horizontal expansion) will be built out when
needed.
 SUPPLEMENT 7 C A PA C I T Y P L A N N I N G 108

3. Use   regression   analysis   to   forecast   the   point   at   which to do only this procedure, and a country club atmosphere that is

Swanson   needs   to   “build   out”   the   top   two   floors   of   the   new pleasant to both staff and patient. A lot of self­care with early
building. ambulation from operating table and to meals reduces costs and
Regression analysis on the birth data in Table S7.3 yields: improves recovery. The short three­day process also supports a
Y = projected births = 5067 + 569x good schedule from the point of view of the staff—allowing
low staffing on the weekends. The one hole in the system is
(where x = time in years. x = 1 is 1995, x = 2 is 1996,…
that the facility does not appear to meet the demand, and some
x = 10 in 2004.)
2 of the facility is underutilized on the weekend.
The   R   =   .988,   so   R   =   .98,   a   very   high   coefficient   of  Scheduling: Aggregate scheduling is easy with one product and
determination constant   demand.   Short   term   scheduling,   with   surgery   on
To forecast the point at which the top 2 floors will need to be weekdays, and five days of work tapering off on weekends is
built out; we examine 2005, x = 11 and get y = 11,326; for 2006, convenient   for   both   staff   and   patients.   Reduced   staffing   on
x = 12 gives y = 11, 895; for 2007, x = 13 gives 12,464; for 2008, Saturday   and   Sunday   is   popular.   Moreover,   the   schedule
x = 14 gives 13,033; for 2009, x = 15 gives 13,602. provides   full   utilization   of   facilities   on   weekdays   with
So the top two floors need to be built out before 2009. underutilization on weekends.
 Location:   suburban   Toronto,   Canada,   makes   it   reasonably
INTERNET CASE STUDIES* convenient for its worldwide customer base.
 Human   resource   management   appears   to   be   well   handled.
1 CAPACITY PLANNING AT SHOULDICE  Although the case is not explicit, the turnover of staff is low
1
HOSPITAL and the working conditions pleasant.
Class discussion: Although this case is structured as a capacity  Supply chain and inventory have little impact on the case, but
case, it does lend itself to a much broader discussion of service the   steady   consistent   flow   of   patients   does   make   the
operations.   Consistent   with   our   approach   of   focusing   on   the development of good relations with suppliers easy and aid in
10 strategic decisions of operations, note for instance: the establishment of efficient inventory procedures.
 Maintenance and reliability, because of the consistent nature of
 Design   and   selection   of   the   product.   Patients  are  selected— the   process,   should   be   known   and   easily   scheduled,   with
only patients with uncomplicated external hernias and who are weekends available for major work.
in good health are admitted.
 Quality  is  much  easier  with  a  standardized  low­risk  product Discussion Questions for Shouldice Case
and   a   state­of­the­art   process   such   as   the   one   that   exists   at  1. Shouldice beds are only fully utilized three days per week,
Shouldice. Documented in the case by a 1% recurrence rate vs but doctors operate five days: so the question of utilization has at
10% for general hospitals. least these two perspectives.
 Process   design,   although   for   a   service,   is   nearly   ideal.   The Utilization = actual/design = 450/(90  7) = .71 = 71%
system is process oriented around reception, dining, operation
 2. Per the table below, if surgery is added on Saturday and held
rooms, recovery, etc. But because patients move consistently in
at   30   per   day,   then   added   beds   are   wasted   capacity.   Beds   are
batches between processes, it has some of the attributes of a
available on Saturday under current operating policies.
repetitive   process   (i.e.,   an   assembly   line).   The   process
effectively   supports   the   desired   results   by   providing   early
ambulation,   a   standardized   medical   procedure   with   medical
staff   who   desire  
Beds Used under Current Operations (150 per week)
Check In Monday Tuesday Wednesday Thursday Friday Saturday Sunday
Monday 30 30 30
Tuesday 30 30 30
Wednesday 30 30 30
Thursday 30 30 30
Friday none
Saturday none
Sunday 30 30 30
Total 60 90 90 90 60 30 30

1
Source:   Adopted   from   R.   D.   Chase,   F.   R.   Jacobs.   and   N.   J.   Acquilano.
Operation Management for Competitive Edge  10/e (Boston: Irwin McGraw
Hill, 2004), 404–5.
*These   case   studies   are   found   at   our   companion   web   site
www.prenhall.com/heizer
109 SUPPLEMENT 7 C A PA C I T Y P L A N N I N G

happy  with  life,   then  the  decision  might  well  be  made  on  other
Beds Used with Saturday Surgery (180 criteria.)
per week)
Check In Monday Tuesday Wednesday Thursday Friday Saturday Sunday
Monday 30 30 30
Tuesday 30 30 30
Wednesday 30 30 30
Thursday 30 30 30
Friday 30 30 30
Saturday none
Sunday 30 30 30
Total 60 90 90 90 90 60 60

Utilization = 540/(90 )  .857 85.7%

3.   If beds are increased by 50% (to 135) but surgery is held at
30 per day, the added capacity is wasted.
 With the added beds, surgeries could move from 30 per
day to 45 per day.
 A 50% increase in bed capacity needs to be matched with
45 surgeries Monday, Tuesday, Wednesday, and Thursday
to fully utilize facilities 4 days per week.
 If 30 surgeries are performed each day in 5 rooms, then 6
are performed in each room. To perform 45 per day, the
rooms   will   need   to   be   occupied   9   hrs   per   day   or   more
rooms   will   need   to   be   added.   Extending  the  hours  may
complicate the smooth recovery process used at Shouldice.
More operating rooms are recommended.

Beds Used with 50% Increase in Beds (225 per week if surgery keeps up)
Check In Monday Tuesday Wednesday Thursday Friday Saturday Sunday
Monday 45 45 45
Tuesday 45 45 45
Wednesday 45 45 45
Thursday 45 45 45
Friday none
Saturday none
Sunday 45 45 45
Total 90 13 135 135 90 45 45
5

Several perspectives on cost exist, just as do capacity options. Here are some hypothetial costs for one capacity 
option: 15 more surgeries per day.
Income for 15 more surgeries at $2,400 each  $ 36,000 Daily receipts
Less surgery cost at $800 per surgery  $ 12,000 Less surgery cost
Less other costs (room/meals/supplies; $ 15,000 Less est. of other costs
assume $500/day) [Not given in case]
Daily income after surgery costs  $ 9,000 Daily income
Five surgeries per day  5 days  50 weeks $ Yearly income (9,000  1,250)
11,250,000
 1,250 surgeries
Bed cost over 5 years = ($100,000  45 beds)/5 years  $ 900,000 Yearly write-off of bed cost
Net income per year $ Yearly income

If the expansion decision is made on the basis of ROI, this is a very
good investment. (NPV is ignored, but can be added—no interest
rate is given in the case.)
The   expansion   could   be   made   on   other   basis   (i.e.,   Shouldice
investors and personnel decide they are doing a good job and are
 SUPPLEMENT 7 C A PA C I T Y P L A N N I N G 110

SOUTHWESTERN UNIVERSITY: D
2
1. Determine weighted contribution.
Selling Var. Percent of Percent
Items Price/ea Cost/ea VC/SP 1(VC/SP) Revenues Contribution
Soft Drinks $1.50 $0.75 0.50 0.50 25% 0.125
Coffee $2.00 $0.50 0.25 0.75 25% 0.1875
Hot Dogs $2.00 $0.80 0.40 0.60 20% 0.120
Hamburgers $2.50 $1.00 0.40 0.60 20% 0.120
Misc. Snacks $1.00 $0.40 0.40 0.60 10% 0.060
100 0.612
% 5
Determine fixed cost per game:
Prorated salaries/5 games = $ 20,000.00
2,400 sq. ft  $2 $ 4,800.00
6 people  6 booths  $7  5 hrs. $ 1,260.00
$
26,060.00
Breakeven = $26,060/0.6125 = $
42,546.94

2.  At 70,000 attendees, each spend the following:     Total Sales at BE $42,546.94
Percent of = Percent Sales per person
Revenues of Sales = 70,000
Soft Drinks 25% $ 10,636.73 $ 0.152
Coffee 25% $ 10,636.73 $ 0.152
Hot Dogs 20% $ 8,509.39 $ 0.122
Hamburgers 20% $ 8,509.39 $ 0.122
Misc. Snacks 10% $ 4,254.69 $ 0.061
Total sales at BE $ $ 0.609 Average per person food
= 42,546.94 sale

At 27,000 attendees, each spend the following:
Percent of = Percent Sales per person
Revenues of Sales = (/27,000)

Soft Drinks 25% $ 10,636.73 $ 0.394

Coffee 25% $ 10,636.73 $ 0.394
Hot Dogs 20% $ 8,509.39 $ 0.315
Hamburgers 20% $ 8,509.39 $ 0.315
Misc. Snacks 10% $ 4,254.69 $ 0.158
Total Sales at BE $ $ 1.576 Average per person food
= 42,546.94 sale
Units sales at breakeven
Percent of = Percent Number of Units
Revenues of Sales = Selling Price Sold of Break-even
(/SP)

Soft Drinks 25% $10,636.73 $1.50 7,091.2

Coffee 25% $10,636.73 $2.00 5,318.4
Hot Dogs 20% $8,509.39 $2.00 4,254.7
Hamburgers 20% $8,509.39 $2.50 3,403.8
Misc. Snacks 10% $4,254.69 $1.00 4,254.7
Total Sales at $42,546.9
BE = 4

This data indicates that drinks (soft drinks and coffee) total 12,409.6
This data indicates that hot dogs and hamburgers total   7,658.5
This data indicates that misc. snacks total   4,254.7
Maddux thinks his forecast is safe and that sales will exceed his