Capacity Planning

Edited and compiled by:

DR\ Maha Misbah
 Decision making
Decision making: Is the essence of management

Steps of decision making:

1- Identifying opportunities and diagnosing problems.

2- Identifying objectives and other criteria.
3- Allocating weight to
criteria. 4- Developing
alternatives.
5- Analysis (Evaluating) of alternatives.
6- Reaching decisions (Selecting an alternative)
7- Implementing the decision.
8- Evaluating results (Get feedback).
9- Follow up.
 Capacity planning
Capacity:
worker, machine, work center, plant, or an organization to produce output in a time p

Is the upper -limit or ceiling on the load that an operating unit can
handle. -
The output, of the number of units a facility can hold, receive, store, or produce i
Defining and measuring capacity

Design capacity (Theoretical): Maximum / Theoretical output rate or

service capacity an operation, process, or facility is designed for.
- Happens in Ideal (Optimal) conditions

Effective capacity: Capacity a firm can expect to receive given its product
mix, methods of scheduling, maintenance, and standards of quality.
- Happens in normal conditions

Actual capacity (Output): Rate of output actually achieved. Can't exceed

effective capacity.
Defining and measuring capacity
Notes
- Effective capacity is usually less than design capacity.
- Actual output can't exceed effective capacity.

Efficiency:
- Actual output as a percentage of effective capacity.
- It is the percent of the effective capacity actually achieved.

Efficiency = Actual output / Effective capacity.

Defining and measuring capacity
Utilization
- Actual output as a percentage of design capacity.
- It is the percent of the design capacity actually achieved.

Utilization = Actual output / Design capacity.

Notes:
Effective capacity cannot exceed design capacity.
Actual output cannot exceed effective capacity.
Design capacity > Effective capacity > Actual output.
Examples
EX1:
Given the information below, calculate the efficiency and the
utilization of the vehicle repair department:

Design capacity = 50 trucks / day. Effective capacity = 40 trucks / day.

Actual output = 36 trucks / day.
The Answer:

Efficiency = Actual output / Effective capacity = 36 / 40 = 90 %

Utilization = Actual output / Design capacity = 36 / 50 = 72 %
 Examples
EX2:
Sara James bakery has a

plant for processing breakfast rolls. Actual

production last week was 148,000 rolls. Design capacity is 1200 rolls per
hour. Effective capacity is 175,000 rolls. Bakery operates 7 days / week, 3
– 8 hour shifts per day. The line was designed to process the nut – filled
cinnamon – Flavored deluxe roll at a rate of 1,200 per hour.
ization and efficiency?
he firm adds a new line which has an efficiency rate of 75 %, what is the expected o
tput is 150,000, what is the efficiency?
 Examples
A) Computing utilization and efficiency:

Design capacity = (7 X 3 X 8) X 1,200 = 201,600 rolls.

Utilization = Actual output / Design capacity = 148,000 / 201,600 = 73.4 %

Efficiency = Actual output / Effective capacity = 148,000 / 175,000 = 84.6 %

 Examples
B) Assuming that the firm adds a new line which has an
efficiency rate of 75 %, what is the expected output of
this line?

Efficiency = Actual output / Effective capacity

75 % = Actual output / 175,000

Then actual (Expected) output = 75 % X 175,000 = 131,250 rolls.%

Examples
C) If the actual output is 150,000, what is the efficiency?

Efficiency = Actual output / Effective capacity = 150,000 / 175,000 = 85.7 %

Break-even analysis
Break – even analysis:

- A technique for evaluating process and equipment alternatives.

- A mean of finding the point, in dollars and units, at which costs equals
revenues.
- is used to handle capacity.

Cost volume analysis focuses on the relationship between cost, revenue,

and volume of output.
Break-even analysis
Fixed costs:

- Costs that tend to remain constant regardless of volume of output.

- Total fixed cost is constant (Within a specified range), but Fixed Cost
/ Unit is variable.
Variable costs
- focuses on the relationship between cost, revenue, and volume of
output.
- The major components of variable costs are labor and materials.
- Variable costs (VC) = Quantity of output (Q) X variable cost per unit (v)
Break-even analysis
Total costs:

- Total costs = Fixed costs (FC) + Variable costs (VC)

- Total revenue = Revenue or price per unit (R) X quantity of output (Q)
Break-even analysis (Single product)
Break-even analysis (Single product)
Where:
Break-even analysis
Occurs when:

TR = TC or PX = Fc + Vc
Break-even analysis
EX1:

FC = $ 10,000
Material = $ 1.5 / unit
Direct labor = $1.5 / unit
Selling price (P) = $ 5 /
unit.

Calculate 𝑩𝑬𝑷𝒙 and 𝑩𝑬𝑷𝒗

Break-even analysis
The answer:

Break – even occurs when TR = TC

Variable cost per unit = 1.5 + 1.5 = $ 3
PX = FC + VX
5X = 10,000 + 3X
2X = 10,000
X = 5000 units
Or: 𝑩𝑬𝑷𝒙 = FCP/ (P-V) = 10,000/ (5−30 = 5000 units
Break-even analysis
EX2:

Stephens, Inc., has fixed costs of $ 10,000 this

period. Direct labor is $ 1.5 per unit, and
material is $ 0.75 per unit. The selling price is $
4 per unit.

Compute: A) The break-even point in units. B) and break-even

point in value.
Break-even analysis
The answer

1- BEPx = FC / (P-V) = 10000 / (4 – 2.25) =

5714.29 units.

2- BEP$ = FC / (1 – [v/p]) = 10000 / (1 – [2.25 /4])

= $22857.14
Break – Even analysis: Multiproduct
case:
Break-even analysis
Total costs:

- Total costs = Compute the total revenue for each product:

Total revenue = Q X Price / Unit. = PX costs
- Compute the revenue percentage for each item:
Revenue percentage = Total revenue for each item / Total revenue
for all items.

- Compute contribution margin percentage for the unit of each item:

 Break-even analysis
Total costs:

- Compute weighted contribution margin percentage

Weighted contribution margin percentage = Revenue percentage (For

each item) X Contribution percentage (for that item).
tal break
- – even point (In value) = FC / Total weighted contribution margin percentage
 CAPACITY PLANNING
Cost comparison: The cross over (Indifference point):

ifference
- point: The output level at which the two or more alternatives generate equa

The Cross
- over (Indifference) point is found when we are indifferent between two plan
CAPACITY PLANNING

 If the expected production quantity is less than the break –

even quantity, the location with the lowest fixed cost is
the best.

 If the expected production quantity is greater than the

break – even quantity, the location with the lowest
variable cost is the best.
CAPACITY PLANNING

Example 1

A fabrication company wants to increase capacity by adding a

new machine. The firm is considering proposals from four
vendors. Fixed and variable costs are shown below.
Which alternative will produce the lowest cost?
Machine Digital Automatic Mechanic Manual
FC 9500 3500 1500 1500
VC/ Unit 6 8 10 12
CAPACITY PLANNING
The answer

- In order to determine over what range each alternative is

best, you should compare between each of two
alternatives. (Exclude the alternatives that are not logic).

- Mechanic and manual machines have the same FC, but

manual has more VC / Unit. So, manual machine will
be excluded from computations.
CAPACITY PLANNING
Digital and automatic

- Indifference point (Q) = (9500 – 3500) / (8 – 6) = 3000 units.

- At 3000 units, digital and automatic machines will have
the same total costs.
- At units below 3000 (From 1 to 2999), Automatic
machine will be better because it has the lowest fixed
cost.
- At units more than 3000, digital machine will be
better because it has the lowest variable cost.
CAPACITY PLANNING
Digital and Mechanic

- Indifference point (Q) = (9500 – 1500) / (10 – 6) = 2000 units.

- At 2000 units, digital and mechanic machines will have the
same total costs.
- At units below 2000 (From 1 to 1999), Mechanic machine will
be better because it has the lowest fixed cost.
- At units more than 2000, digital machine will be better
because it has the lowest variable cost.
CAPACITY PLANNING
Automatic and Mechanic:

- Indifference point (Q) = (3500 – 1500) / (10 – 8) = 1000 units.

- At 1000 units, automatic and mechanic machines will have
the same total costs.
- At units below 1000 (From 1 to 999), Mechanic machine will
be better because it has the lowest fixed cost.
- At units more than 1000, Automatic machine will be
better because it has the lowest variable cost.
CAPACITY PLANNING
Decision Tree

- Decision tree: A visual representation of Choices, Consequences,

Probabilities, and opportunities.
Decision Tree rules
CAPACITY PLANNING
 You have the following decision tree. Which decision is best
to choose? Payoffs are expressed in profits.
CAPACITY PLANNING
Answer

1- Determine which alternative would be selected for each possible

second decision.

For small facility with high demand, there are two choices: Don't
expand and expand. You will choose Expand because it has the
highest payoff. (135,000)
CAPACITY PLANNING
Answer

2- Determine the product of the change probabilities and their

respective payoffs for the remaining branches:
CAPACITY PLANNING
Answer

1- Determine the product of the change probabilities and their

respective payoffs for the remaining branches:
CAPACITY PLANNING
Answer

3- Determine the expected value of each initial alternative:

Build Small = 28000 + 81000 = $109000

Build Large = 16000 + 132000 = $148000
So, the best choice is to build large facility because it has
the highest expected monetary value.