Chapter 7 (supplement): Multiple Choice Questions

1. Effective capacity is the

a. maximum output of a system in a given period
b. the capacity a firm expects to achieve given the current operating constraints
c. average output that can be achieved under ideal conditions
d. minimum usable capacity of a particular facility

2. Design capacity is the

a. average output that can be achieved under ideal conditions
b. actual production over a specified time period
c. maximum usable capacity of a particular facility
d. maximum output of a system in a given period

3. The Academic Computing Center has five trainers available in its computer labs to provide training sessions
to students. Assume that the capacity of the system is 1,900 students and the utilization is 90%. If the
maximum number of students who can get their orientation session is 1,800, what is the efficiency of the
system?
a. 1,350 students
b. 1,710 students
c. 95%
d. 87.7%
e. 90%

4. Organizations have four approaches for capacity expansion. Which of the following is not one of them?
a. lead demand with incremental expansion
b. lag demand with one-step expansion
c. lag demand with incremental expansion
d. lead demand with one-step expansion
e. average capacity with incremental expansion

5. Which of the following is false regarding capacity expansion?

a. "Average" capacity sometimes leads demand, sometimes lags it.
b. If "lagging" capacity is chosen, excess demand can be met with overtime or subcontracting.
c. Total cost comparisons are a rather direct method of comparing capacity alternatives.
d. Capacity may only be added in large chunks.

6. Basic break-even analysis typically assumes that

a. revenues increase in direct proportion to the volume of production, while costs increase at a
decreasing rate as production volume increases
b. variable costs and revenues increase in direct proportion to the volume of production
c. both costs and revenues are made up of fixed and variable portions
d. costs increase in direct proportion to the volume of production, while revenues increase at a
decreasing rate as production volume increases because of the need to give quantity discounts

7. Break-even is the number of units at which

a. total revenue equals price times quantity
b. total revenue equals total variable cost
c. total revenue equals total fixed cost
d. total profit equals total cost
e. total revenue equals total cost

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

9. Which of the following costs would be incurred even if no units are produced?
a. raw material costs
b. direct labor costs
c. transportation costs
d. building rental costs

10. A fabrication company wants to increase capacity by adding a new machine. The firm is considering
proposals from vendor A and vendor B. The fixed costs for machine A are $90,000 and for machine B,
$75,000. The variable cost for A is $15.00 per unit and for B, $18.00. The revenue generated by the units
processed on these machines is $21 per unit. If the estimated output is 5,000 units, which machine should be
purchased?
a. machine A
b. machine B
c. either machine A or machine B
d. no purchase because neither machine yields a profit at that volume

11. Fred's Fabrication, Inc. wants to increase capacity by adding a new machine. The firm is considering
proposals from vendor A and vendor B. The fixed costs for machine A are $90,000 and for machine B,
$70,000. The variable cost for A is $9.00 per unit and for B, $14.00. The revenue generated by the units
processed on these machines is $20 per unit. The crossover between machine A and machine B is
a. 4,000 units, with A more profitable at low volumes
b. 4,000 dollars, with A more profitable at low volumes
c. 4,000 units, with B more profitable at low volumes
d. 4,000 dollars, with B more profitable at low volumes

12. A shop wants to increase capacity by adding a new machine. The firm is considering proposals from vendor
A and vendor B. The fixed costs for machine A are $90,000 and for machine B, $75,000. The variable cost
for A is $15.00 per unit and for B, $18.00. The revenue generated by the units processed on these machines
is $22 per unit. If the estimated output is 9,000 units, which machine should be purchased?
a. machine A
b. machine B
c. either machine A or machine B
d. no purchase because neither machine yields a profit at that volume
e. purchase both machines since they are both profitable

13. Which of the following is not a strategic consideration for strategic-driven investments?
a. Select investments as part of a coordinated strategic plan.
b. Choose investments that yield competitive advantage.
c. Choose investments that minimize cost.
d. Test investments in the light of several revenue projections.

14. Which of the following is a strategic consideration for strategic-driven investments?

a. Select investments as part of a coordinated strategic plan.
b. Choose investments that yield competitive advantage.
c. Choose investments that consider product life cycles.
d. Test investments in the light of several revenue projections.
e. All of the above are strategy driven.
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15. Net present value
a. is gross domestic product less depreciation
b. is sales volume less sales and excise taxes
c. is profit after taxes
d. ignores the time value of money
e. is the discounted value of a series of future cash receipts

16. Net present value will be greater

a. as a fixed set of cash receipts occurs later rather than earlier
b. as the total of the cash receipts, made in same time periods, is smaller
c. for one end-of-year receipt of $1,200 than for twelve monthly receipts of $100 each
d. for a 4% discount rate than for a 6% discount rate

17. The basic break-even model can be modified to handle more than one product. This extension of the basic
model requires
a. sales volume for each product
b. three-dimensional graphing software
c. at least a Pentium computer
d. price and cost for each product, as well as the percent of total sales that each product represents

Chapter 7 (supplement): Multiple Choice Answers

1. b
10. d
2. d
11. c
3. c
12. d
4. b
13. c
5. d
14. e
6. b
15. e
7. e
16. d
8. d
17. d
9. d