STRATEGIC Operations

CAPACITY Management
PLANNING FOR and TQM
GOODS & SERVICES Unit VI

1
 2

LEARNING OBJECTIVES
At the end of this module, you will be able to
• Summarize the importance of capacity
planning.
• Discuss ways of defining and measuring
capacity.
• Describe the determinants of effective
capacity.
• Discuss the major considerations related
to developing capacity alternatives.
• Briefly describe approaches for
evaluating capacity alternatives.
 3

WHAT IS CAPACITY?
• the upper limit or ceiling on the load that an
operating unit can handle.

Plant number of physical units

Department produced
machine number of services
worker performed
 4

WHAT IS CAPACITY?
the maximum amount
that can be produced in a
given time
 5

GOAL OF CAPACITY PLANNING

• achieve a match between the

long-term supply capabilities of
an organization and the
predicted level of long-term
demand.
 6

GOAL OF CAPACITY PLANNING

Current Gap Desired
Capacity Capacity

imbalance

Overcapacity = Under capacity = strained

very high costs resources, loss of customers
 7

WHY IS CAPACITY PLANNING DONE?

• Changes in demand
• Changes in technology
• Changes in the environment
• Perceived threats / or opportunities
 8

BASIC QUESTIONS OF
CAPACITY PLANNING
• What kind of capacity is
needed?

• How much is needed?

• When it is needed?
 9

DEFINING & MEASURING

CAPACITY
• In selecting a measure of capacity, it is important to
choose one that does not require updating

• Where only one product or service is involved, the

capacity of the productive unit may be expressed in terms
of that item
 10

DEFINING & MEASURING

CAPACITY
MULTIPLE PRODUCTS
• One possible solution is to state capacities in terms
of each product
• Preferred alternative in such cases is to use a
measure of capacity that refers to availability of
inputs
 11

DEFINING & MEASURING CAPACITY

 12

TYPES OF CAPACITY
• Design capacity

• maximum output rate or

service capacity an
operation, process, or facility
is designed for

• maximum output rate

achieved under ideal
conditions
 13

TYPES OF CAPACITY
• Effective capacity
• is the realistic limit that can
sustain over the long term.
• design capacity minus
allowances such as personal
time, maintenance, and scrap
 14

CAPACITY
• Actual output
• rate of output actually achieved-
-cannot exceed effective
capacity.
• Reasons:
• Machine breakdown
• Absenteeism
• Materials shortage
• Quality problems
 15

MEASURES OF SYSTEM EFFECTIVENESS

𝐴𝑐𝑡𝑢𝑎𝑙 𝑂𝑢𝑡𝑝𝑢𝑡
𝐸𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑐𝑦 = 𝑥 100
𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦

𝐴𝑐𝑡𝑢𝑎𝑙 𝑂𝑢𝑡𝑝𝑢𝑡
𝑈𝑡𝑖𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 = 𝑥 100
𝐷𝑒𝑠𝑖𝑔𝑛 𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦

Both measures expressed as percentages

 16

Design capacity = 50 trucks/day

Effective capacity = 40 trucks/day
Actual output = 36 units/day

𝑨𝒄𝒕𝒖𝒂𝒍 𝑶𝒖𝒕𝒑𝒖𝒕 𝟑𝟔
• 𝑬𝒇𝒇𝒊𝒄𝒊𝒆𝒏𝒄𝒚 = = = 𝟗𝟎%
𝑬𝒇𝒇𝒆𝒄𝒕𝒊𝒗𝒆 𝑪𝒂𝒑𝒂𝒄𝒊𝒕𝒚 𝟒𝟎

𝑨𝒄𝒕𝒖𝒂𝒍 𝑶𝒖𝒕𝒑𝒖𝒕 𝟑𝟔
• 𝑼𝒕𝒊𝒍𝒊𝒛𝒂𝒕𝒊𝒐𝒏 = = = 𝟕𝟐%
𝑫𝒆𝒔𝒊𝒈𝒏 𝑪𝒂𝒑𝒂𝒄𝒊𝒕𝒚 𝟓𝟎

EXAMPLE
 SAMPLE EXERCISES 17

1. Determine the utilization and the efficiency for each of

these situations:
a. A loan processing operation that processes an average
of 7 loans per day. The operation has a design capacity
of 10 loans per day and an effective capacity of 8 loans
per day.
b. A furnace repair team that services an average of four
furnaces a day if the design capacity is six furnaces a day
and the effective capacity is five furnaces a day.
c. Would you say that systems that have higher efficiency
ratios than other systems will always have higher
utilization ratios than those other systems? Explain.
 18

𝑨𝒄𝒕𝒖𝒂𝒍 𝑶𝒖𝒕𝒑𝒖𝒕 𝟕
• 𝑬𝒇𝒇𝒊𝒄𝒊𝒆𝒏𝒄𝒚 = = = 𝟖𝟕. 𝟓%
𝑬𝒇𝒇𝒆𝒄𝒕𝒊𝒗𝒆 𝑪𝒂𝒑𝒂𝒄𝒊𝒕𝒚 𝟖

𝑨𝒄𝒕𝒖𝒂𝒍 𝑶𝒖𝒕𝒑𝒖𝒕 𝟕
• 𝑼𝒕𝒊𝒍𝒊𝒛𝒂𝒕𝒊𝒐𝒏 = = = 𝟕𝟎%
𝑫𝒆𝒔𝒊𝒈𝒏 𝑪𝒂𝒑𝒂𝒄𝒊𝒕𝒚 𝟏𝟎

𝑨𝒄𝒕𝒖𝒂𝒍 𝑶𝒖𝒕𝒑𝒖𝒕 𝟒
• 𝑬𝒇𝒇𝒊𝒄𝒊𝒆𝒏𝒄𝒚 = = = 𝟖𝟎%
𝑬𝒇𝒇𝒆𝒄𝒕𝒊𝒗𝒆 𝑪𝒂𝒑𝒂𝒄𝒊𝒕𝒚 𝟓

𝑨𝒄𝒕𝒖𝒂𝒍 𝑶𝒖𝒕𝒑𝒖𝒕 𝟒
• 𝑼𝒕𝒊𝒍𝒊𝒛𝒂𝒕𝒊𝒐𝒏 = = = 𝟔𝟔. 𝟔𝟕%
𝑫𝒆𝒔𝒊𝒈𝒏 𝑪𝒂𝒑𝒂𝒄𝒊𝒕𝒚 𝟔

EXAMPLE
 19

DETERMINANTS OF EFFECTIVE
CAPACITY

Facilities
• design of facilities, including size and provision for expansion
• Locational factors, such as transportation costs, distance to
market, labor supply, energy sources, and room for expansion
• layout of the work area determines how smoothly work can
be performed
• environmental factors such as heating, lighting, and
ventilation also play a significant role
 20

DETERMINANTS OF EFFECTIVE
CAPACITY

• Product and service design factors

• Generally speaking, the more uniform the
output, the more opportunities there are for
standardization of methods and materials,
which leads to greater capacity.
 21

DETERMINANTS OF EFFECTIVE
CAPACITY

• Process factors
• Refers to quantity capability of a process
• A more subtle determinant is the influence of
output quality
• Productivity also affects capacity
• Number of products or services processed on
batches
 22

DETERMINANTS OF EFFECTIVE
CAPACITY

• Human factors
• tasks that make up a job
• variety of activities involved
• training, skill, and experience required to
perform a job
 23

DETERMINANTS OF EFFECTIVE
CAPACITY

• Policy factors
• Management policy can affect
capacity by allowing or not allowing
capacity options such as overtime or
second or third shifts
 24

DETERMINANTS OF EFFECTIVE
CAPACITY

• Operational factors
• Inventory stocking decisions
• Late deliveries
• Purchasing requirements
• Acceptability of purchased materials and parts
• Quality inspection and control procedures
• Equipment Capabilities
 25

DETERMINANTS OF EFFECTIVE
CAPACITY

• Supply chain factors

• Capability of the supply chain to handle
changes, especially expansion
• Take into account possible impact of
decrease capacity on the elements of the
supply chain
 26

DETERMINANTS OF EFFECTIVE
CAPACITY

• External factors
• Product standards
• especially minimum quality and performance
standards
• pollution standards on products and equipment
• union contract limits the number of hours and type
of work an employee may do
 27

Three Primary Strategies

•Leading - builds capacity in
anticipation of future demand
increases. If capacity increases
involve a long lead time, this
CAPACITY strategy may be the best option
•Following - builds capacity when
STRATEGIES demand exceeds current
capacity
•Tracking - similar to a following
strategy, but it adds capacity in
relatively small increments to keep
pace with increasing demand
 28

Capacity cushion - extra

capacity used to offset
demand uncertainty
CAPACITY • Cushions are incorporated into
the decisions that are made
STRATEGIES
Capacity cushion =
capacity minus
expected demand
 29

CALCULATING PROCESSING
REQUIREMENTS

• Capacity requirements of products that will be

processed is an important information needed in
capacity planning.
• The information needed are the following:
• accurate demand forecasts for each product
• standard processing time per unit for each product
• the number of workdays per year
• the number of shifts that will be used.
 30

CALCULATING PROCESSING
REQUIREMENTS

𝑃𝑟𝑜𝑐𝑒𝑠𝑠𝑖𝑛𝑔 𝑡𝑖𝑚𝑒 𝑛𝑒𝑒𝑑𝑒𝑑

𝑈𝑛𝑖𝑡𝑠 𝑐𝑎𝑝𝑎𝑐𝑖𝑡𝑦 𝑛𝑒𝑒𝑑𝑒𝑑 =
𝑃𝑟𝑜𝑐𝑒𝑠𝑠𝑖𝑛𝑔 𝑡𝑖𝑚𝑒 𝑐𝑎𝑝𝑎𝑐𝑖𝑡𝑦 𝑝𝑒𝑟 𝑢𝑛𝑖
 EXAMPLE 31

A department works one 8-hour shift, 250 days a year, and has these
figures for usage of a machine that is currently being considered:
Product Annual Standard Processing time per Processing time
Demand unit needed
#1 400 5 2,000
#2 300 8 2,400
#3 700 2 1,400

Working one 8-hour shift 250 days a year provides an annual capacity of 8 × 250 = 2,000
hours per year. Consequently, three of these machines would be needed to handle the
required volume:
5,800 ℎ𝑜𝑢𝑟𝑠
= 2.90 ≈ 3.0 𝑚𝑎𝑐ℎ𝑖𝑛𝑒𝑠
2,000 ℎ𝑜𝑢𝑟𝑠 𝑝𝑒𝑟 𝑚𝑎𝑐ℎ𝑖𝑛𝑒
 PRACTICE PROBLEM
32

• Determine how many machines would be needed for each machine if

each machine operates 10 hours a day, 250 days a year

Demand
Processing Time Per Unit
Product
(Minutes) per machine
A B C
1 16,000 3 4 2
2 12,000 4 4 3
3 6,000 5 6 4
4 30,000 2 2 1
 33

Processing Time Per

P D Unit (Minutes) Total Processing Time
A B C A B C
1 16,000 3 4 2 48,000 64,000 32,000
2 12,000 4 4 3 48,000 48,000 36,000
3 6,000 5 6 4 30,000 36,000 24,000
4 30,000 2 2 1 60,000 60,000 30,000
Total Processing Time (in minutes) 186,000 208,000 122,000
Total Processing Time (in hours) 3,100 3,466.67 2,033.33
No. of Machines needed (2,500 hours/yr)
(10 hours x 250 per yr) 1.24 = 2 1.39 = 2 0.813 = 1
No of machine 2 2 1
 34

MAKE OR BUY
DO IT IN-HOUSE OR OUTSOURCE IT

IMPORTANT considerations
• Available capacity
• Available the equipment, necessary
skills, and time
• Cost considerations
• Expertise
• Quality considerations
 35

IMPORTANT considerations

• Nature of demand
• demand for an item is high and
MAKE OR BUY steady (MAKE) vs wide
DO IT IN- fluctuations in demand or small
HOUSE OR orders (BUY)
OUTSOURCE IT • Cost (make vs buy)
• Risks
• Loss of direct control over
operations, knowledge sharing,
and the possible need to
disclose proprietary information
 36

DEVELOPING CAPACITY
ALTERNATIVES

1 2 3 4 5 6
Design Take stage Take a “big Prepare to Attempt to Identify the
flexibility of life picture” deal with smooth out optimal
approach to capacity operating
into the cycle into capacity capacity requirements
system account “chunks” level
changes
(bottleneck
operation)
 37

Design flexibility into the

system
• Capacity decisions are long term
DEVELOPING in nature
CAPACITY • The risks inherent in long-term
ALTERNATIVES forecasts suggest that designing
flexible systems has potential
benefits
 38

DESIGNING FLEXIBILITY
INTO THE SYSTEM
• Example:
• A new golf course may start as a 9-hole
operation, but if provision is made for future
expansion by obtaining options on adjacent
land, it may progress to a larger (18-hole)
course
 39

Take stage of life cycle into

account
• Introduction phase
DEVELOPING • difficult to determine both the
CAPACITY size of the market and the
eventual market share
ALTERNATIVES • organizations should be cautious
in making large and/or inflexible
capacity investments.
 40

• Growth phase
• Overall market may experience
rapid growth
• The real issue is the rate at which
the market share grows, which
TAKING INTO may be more or less than the
market rate
ACCOUNT • Growth requires increasing
STAGE OF LIFE capacity, that means increasing
investment and increasing
CYCLE complexity
• take into account possible similar
moves by competitors, which
would increase the risk of
overcapacity in the market, and
result in higher unit costs of the
output
 41

• Maturity phase
• Size of market levels off
• Organizations tend to have stable
market shares
TAKING INTO • Profitability can be increased
ACCOUNT by reducing costs and making
STAGE OF LIFE full use of capacity
CYCLE • Some organizations may still try
to increase profitability by
increasing capacity if they believe
this stage will be long or the cost
to increase capacity is relatively
small
 42

• Decline phase
• underutilization of capacity due to
declining demand
• may eliminate the excess
TAKING INTO capacity by selling it, or by
ACCOUNT introducing new products or
STAGE OF LIFE services
CYCLE • Another option is to transfer
capacity to a location that has
lower labor costs, which allows the
organization to continue to make
a profit on the product for a while
longer
 43

Take a “big-picture”
(i.e., systems) approach
to capacity changes.
DEVELOPING
• When developing capacity
CAPACITY alternatives, it is important to
ALTERNATIVES consider how parts of the
system interrelate
• Risk – unbalanced system
• Bottleneck operation
 44

Bottleneck operation

TAKING A an operation in a sequence of operations

SYSTEMS whose capacity is lower than the
capacities of other operations in the
APPROACH TO sequence
CAPACITY
CHANGES Consequently, the the capacity of the
capacity of the system is reduced to
bottleneck the capacity of the
operation limits the bottleneck
system capacity operation
 45

BOTTLENECK OPERATION
 TAKING A SYSTEMS APPROACH 46

Four-step process of aTO CAPACITY CHANGES

certain bottling hall:
Preparation Bottling Labeling Packing
Area Area Area Area
Input Output
45,000 50,000 60,000 42,000
btls/day btls/day btls/day btls/day
1. What is the capacity of this process in bottles a day?
2. The bottleneck of this plant is at the ___________?
3. The bottling area is only working at percent utilization of _____?
4. If the bottleneck can be removed, capacity can only be increased up to
____________ bottles a day?
 47

Prepare to deal with

capacity “chunks.”
• Capacity increases are
DEVELOPING often acquired in fairly large
CAPACITY chunks rather than smooth
ALTERNATIVES increments, making it
difficult to achieve a match
between desired capacity
and feasible capacity
 48

Example
PREPARE TO • Desired capacity = 55 units per hour
DEAL WITH • Machine capacity = 40 units per hour
each
CAPACITY • One Machine = 15 units per hour short
CHUNKS • Two machines = overcapacity of 25
units per hour
 49

Attempt to smooth out

capacity requirements
•Unevenness in demand
DEVELOPING poses problems, specially
CAPACITY on capacity decisions,
ALTERNATIVES because this might lead to
either over/under utilization
•Causes: weather, seasonal
variations
 50

Identify the optimal

operating level
•The optimal level of
DEVELOPING operation can be defined
CAPACITY in terms of unit cost of
ALTERNATIVES
output
•At the ideal level, cost per
unit is the lowest for that
production unit
IDENTIFY THE OPTIMAL 51

OPERATING LEVEL

• Identify the
optimal
operating level
 52

OPTIMAL OPERATING LEVEL

Economies of Scale vs Diseconomies

• Output rate is less than optimal • Output is increased

level, increasing the output will beyond the optimal
decrease average unit cost level, the average cost
• Fixed cost spread over more units would become
• Decreasing rate of increase with increasingly larger
respect to facility size
• Processing decreases because of
standardized operations
 53

EVALUATING CAPACITY
ALTERNATIVES

Cost-
Financial Decision Waiting-line
Volume
Analysis Theory Analysis
Analysis
 54

EVALUATING ALTERNATIVES
• Cost-Volume Analysis
• Relationship between cost, revenue
and volume of output
• Purpose: estimate income under
different operating conditions
• Useful tool for comparing capacity
alternatives
• Requires identification of all costs
related to the production of a
given product
 55

Cost-Volume Analysis

FC – remain constant
regardless of output

EVALUATING
ALTERNATIVES VC – vary directly with
volume

•𝑇𝐶 = 𝐹𝐶+𝑉𝐶
•𝑉𝐶 = 𝑄 𝑥 𝑣
 56

Cost–volume analysis can be a valuable

tool for comparing capacity alternatives
if certain assumptions are satisfied:
1. One product is involved.
2. Everything produced can be sold.
EVALUATING 3. The variable cost per unit is the
ALTERNATIVES: same regardless of the volume.
ASSUMPTIONS 4. Fixed costs do not change with
volume changes, or they are step
changes.
5. The revenue per unit is the same
regardless of volume.
6. Revenue per unit exceeds variable
cost per unit.
 EVALUATING ALTERNATIVES: 57

COST-VOLUME ANALYSIS
𝑇𝑅 = 𝑅 𝑥 𝑄
𝑃 = 𝑄 𝑅 − 𝑣 − 𝐹𝐶
𝑃 = 𝑇𝑅 − 𝑇𝐶
𝑃 = 𝑅 𝑥 𝑄 − (𝐹𝐶 + 𝑣 𝑥 𝑄) 𝑄 𝑅 − 𝑣 − 𝐹𝐶 = 𝑃
𝑃 = 𝑄 𝑅 − 𝑣 − 𝐹𝐶
𝑄 𝑅 − 𝑣 = 𝑃 + 𝐹𝐶
The difference between revenue per unit
and variable cost per unit, R − v, is known 𝑃 + 𝐹𝐶
as the contribution margin.
𝑄=
𝑅 −𝑣
The required volume, Q, needed to
generate a specified profit is
𝐹𝐶
𝑄=
𝑃+𝐹𝐶 𝑄𝐵𝐸𝑃 =
𝑅 −𝑣 𝑅 −𝑣
 58

EVALUATING ALTERNATIVES

• Cost-Volume Analysis
The owner of Old-Fashioned Berry Pies, S. Simon, is contemplating adding
a new line of pies, which will require leasing new equipment for a monthly
payment of $6,000. Variable costs would be $2.00 per pie, and pies would
retail for $7.00 each.
a. How many pies must be sold in order to break even?

𝐹𝐶 $6,000
𝑄𝐵𝐸𝑃 = =
𝑅 −𝑣 $7 − $2
= 1,200 𝑝𝑖𝑒𝑠 𝑝𝑒𝑟 𝑚𝑜𝑛𝑡ℎ
 EVALUATING ALTERNATIVES
59

• Cost-Volume Analysis
b. What would the profit (loss) be if 1,000 pies are made and sold
in a month? 𝑃 = 𝑄 𝑅 − 𝑣 − 𝐹𝐶
𝑃 = 1,000 $7 − $2 − $6,000
= −$1,000
c. How many pies must be sold to realize a profit of $4,000?

𝑃 + 𝐹𝐶 $4,000 + $6,000
𝑄= 𝑄=
𝑅 −𝑣 $7 − $2
= 2,000 pies
 60

EVALUATING ALTERNATIVES

• Cost-Volume Analysis
d. If 2,000 can be sold, and a profit target is $5,000, what price
should be charged per pie?
P = Q (R – v) – FC
$5,000 = 2,000 𝑅 − $2 − $6,000
$5,000 = 2,000𝑅 − $4,000 − $6,000
$15,000
𝑅= = $7.50
2,000
 EVALUATING ALTERNATIVES
61

• Capacity alternatives may involve step

costs, which are costs that increase
stepwise as potential volume increases.

• For example, a firm may have the option

of purchasing one, two, or three
machines, with each additional machine
increasing the fixed cost, although
perhaps not linearly. Then fixed costs
and potential volume would depend on
the number of machines purchased. The
implication is that multiple break-even
quantities may occur, possibly one for
each range.
 62

EVALUATING ALTERNATIVES
• Note, however, that the total revenue line
might not intersect the fixed-cost line in
a particular range, meaning that there
would be no break-even point in that
range. This possibility is illustrated in the
figure on the left, where there is no
break-even point in the first range. In
order to decide how many machines to
purchase, a manager must consider
projected annual demand (volume)
relative to the multiple break-even points
and choose the most appropriate
number of machines.
 63

EVALUATING ALTERNATIVES

• Cost-Volume Analysis
A manager has the option of purchasing one, two, or three machines. Fixed
costs and potential volumes are as follows: (note: v = $10 R = $40)

Number of Total Annual Range of a. Determine the break-even point

Machines Fixed Costs Output for each range.

1 $ 9,600 0 to 300 b. If projected annual demand is

between 580 and 660 units, how
2 15,000 301 to 600 many machines should the
manager purchase?
3 20,000 601 to 900
 EVALUATING ALTERNATIVES 64

• Compute the break-even point for each range

Number of Total Annual Range of
Machines Fixed Costs Output Hence, the manager
1 $ 9,600 0 to 300 should choose two
machines.
2 15,000 301 to 600
3 20,000 601 to 900

$9,600 $15,000 $20,000

𝑄𝐵𝐸𝑃𝟏 = 𝑄𝐵𝐸𝑃𝟐 = 𝑄𝐵𝐸𝑃𝟑 =
$40 − $10 $40 − $10 $40 − $10
= 320 𝑢𝑛𝑖𝑡𝑠 = 500 𝑢𝑛𝑖𝑡𝑠 = 667 𝑢𝑛𝑖𝑡𝑠
Not feasible, no breakeven Feasible, Within demand Not Feasible, Breakeven is
more than the demand
 65

EVALUATING CAPACITY ALTERNATIVES

Financial Present
Cash Flow Payback
Analysis Value

Decision Waiting Line

NPV IRR
Theory Analysis
 PRACTICE PROBLEM 66

A firm’s manager must decide whether to make or buy a certain item used in
the production of vending machines. Cost and volume estimates are as follows:

Make Buy
Annual FC $150,000 None
VC/unit $60 $80
Annual Volume
(units) 12,000 12,000

a. Given these numbers, should the firm buy or make this item?
b. There is a possibility that volume could change in the future. At
what volume would the manager be indifferent between making
and buying?
 67

Indifference point – the quantity that would

make two alternatives equivalent.
 68

PRACTICE PROBLEM - SOLUTION

Determine the annual cost of each alternative:
Total cost = Fixed cost + Volume x Variable cost
Make: $150,000 + 12,000($60) = $870,000
Buy: 0 + 12,000($80) = $960,000
DECISION: MAKE

set the two total costs equal to each other, and solve for volume:
TCmake = TCbuy. Thus,
$150,000 + Q($60) = 0 + Q($80).
Solving for Q = 150,000 / 20 = 7,500 units.
Note: This is problem #10 or #11 (depending on the edition) found at the
end of the chapter in Stevenson's Operations Management 69

Machines Cost
A $40,000
PRACTICE PROBLEM
A manager must decide which
B $30,000 type of machine to buy, A, B,
C $80,000 or C.
• Assume that only purchasing
Processing Time Per costs are being considered.
Product Demand
Unit (Minutes) Which machine would have
A B C the lowest total cost, and
1 16,000 3 4 2 how many of that machine
would be needed? Machines
2 12,000 4 4 3 operate 10 hours a day, 250
3 6,000 5 6 4 days/yr
4 30,000 2 2 1
 70

• Consider this additional information: The machines differ

in terms of hourly operating costs: The A machines have
an hourly operating cost of $10 each, B machines have an
hourly operating cost of $11 each, and C machines have
an hourly operating cost of $12 each. Which alternative
would be selected, and how many machines, in order to
minimize total cost while satisfying capacity processing
requirements?

• Answer this problem using google forms:

https://forms.gle/5AN3FKAkLjyVF91g8
A manager is trying to decide
whether to purchase a certain part
73

or to have it produced internally. PRACTICE PROBLEM

Costs Internal Production
a. If the manager anticipates an Process A Process B
annual volume of 10,000 units,
which alternative would be best VC/unit $17 $14
from a cost standpoint? For
20,000 units, which alternative FC $200,000 $240,000
would be best?
Vendor Cost/unit Volume
b. Determine the range for which
each alternative is best. Are there A $20 Any volume up to
any alternatives that are never 30,000 units
best? If yes, which alternative(s)?
B $22 1,000 units or less
SUBMIT THIS ON MONDAY FOR ALL $18 Larger quantities
SECTIONS. LET THE CLASS MAYORS FOR C $21 First 1,000
SECTIONS A & D COLLECT THE
SUBMISSION AND SUBMIT TO ME DURING $19 Additional units
MY CLASSES WITH SECTIONS C AND B