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STRATEGY CHAPTER TRUE/FALSE 1. 7: PROCESS Dell's approach to personal computer manufacturing is to use a product focus, which gives the company its low-cost competitive advantage. False (Global company profile, easy) A firm's process strategy is its approach to transforming resources into goods and services. True (Introduction, easy) Intermittent processes are organized around processes. True (Four process strategies, easy) In process-focused facilities, equipment utilization is low. True (Four process strategies, moderate) The typical full-service restaurant uses a product-focused process. False (Four process strategies, moderate) Harley-Davidson, because it has so many possible combinations of products, utilizes the process strategy of mass customization. False (Four process strategies, moderate) A value-stream map includes both (1) inventory quantities, and (2) symbols for customers and suppliers. True (Process analysis and design, moderate) The assembly line is a classic example of a repetitive process. True (Four process strategies, easy) One essential ingredient of mass customization is modular design. True (Four process strategies, moderate) The tool that calculates which process has the lowest cost at any specified production volume is a crossover chart. True (Four process strategies, moderate) The term focused processes refers to the quest for increased efficiency, whether in goods or services, that results from specialization. True (Four process strategies, moderate) Service blueprinting is a process analysis technique that focuses on the customer and the provider's interaction with the customer. True (Process analysis and design, moderate) 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. Activity times should not be included in a service blueprint. False (Process analysis and design, moderate) A process map with the addition of a time axis becomes a process chart. False (Process analysis and design, moderate) Time-function mapping is a flow diagram with time added to the horizontal axis. True (Process analysis and design, moderate) Process maps use distance, but not time, to show the movement of material, product, or people through a process. False (Process analysis and design, moderate) Professional services typically require low levels of labor intensity. False (Service process design, moderate) An example of the postponement strategy for improving service productivity is having the customer wait until you have sufficient time to serve the customer. False (Service process design, moderate) Process control is the use of information technology to monitor and control a physical process. True (Production technology, easy) {AACSB: Use of IT} One use of camera-and-computer-based vision systems is to replace humans doing tedious and error-prone visual inspection activities. True (Production technology, easy) {AACSB: Use of IT} Automated storage and retrieval systems are commonly used in distribution facilities of retailers. True (Production technology, moderate) {AACSB: Use of IT} Flexible manufacturing systems, because of easily changed control programs, are able to perform such tasks as manufacturing one-of-a-kind parts economically. True (Production technology, moderate) {AACSB: Use of IT} Production technology has had a major impact on services, but as yet there has been little reduction in service labor requirements. False (Technology in services, moderate) {AACSB: Use of IT} Optical checkout scanners and ATMs are examples of technology's impact on services. True (Technology in services, moderate) {AACSB: Use of IT} Successful process redesign focuses on departmental areas where small, continuous improvements can be made. False (Process redesign, moderate) Processes can be environmentally friendly and socially responsible while still contributing to profitable strategies. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. True (Ethics and environmentally friendly processes, easy) {AACSB: Ethical Reasoning} 27. In selecting new equipment and technology, decision-makers look for flexibilitythe ability to respond with little penalty in time, cost, or customer value. True (Selection of equipment and technology, moderate) MULTIPLE CHOICE 28. Which of the following statements regarding Dell Computer is false? 1. a. Dell is a practitioner of the mass customization process. 2. b. Dell builds its computers overseas in order to gain a low-cost advantage. 3. c. Dell keeps very little inventory of finished goods. 4. d. Dell utilizes a global supply chain, but assembles its computers in the U.S. 5. e. Dell's research focuses on manufacturing issues, not computer part design. b (Global company profile, moderate) 29. An organization's process strategy 1. a. will have long-run impact on efficiency and flexibility of production 2. b. is the same as its transformation strategy 3. c. must meet various constraints, including cost 4. d. is concerned with how resources are transformed into goods and services 5. e. All of the above are true. e (Introduction, moderate) 30. A job shop is an example of a(n) 1. a. repetitive process 2. b. continuous process 3. c. line process 4. d. intermittent process 5. e. specialized process d (Four process strategies, moderate) 31. Three types of processes are 1. a. goods, services, and hybrids 2. b. manual, automated, and service 3. c. process focus, repetitive focus, and product focus 4. d. modular, continuous, and technological 5. e. input, transformation, and output c (Four process strategies, moderate) 32. Which of the following industries is likely to have low equipment utilization? 1. a. auto manufacturing 2. b. commercial baking 3. c. television manufacturing 4. d. chemical processing 5. e. restaurants e (Four process strategies, moderate) 33. A product-focused process is commonly used to produce 1. a. high-volume, high-variety products 2. b. low-volume, high-variety products 3. c. high-volume, low-variety products 4. d. low-variety products at either high- or low-volume 5. e. high-volume products of either high- or low-variety c (Four process strategies, moderate) 34. Which one of the following products is most likely made in a job shop environment? 1. a. a daily newspaper 2. b. paper forms 3. c. television sets 4. d. cigarettes 5. e. canned vegetables b (Four process strategies, moderate) 35. Which of the following products is likely to be assembled on a repetitive process line? 1. a. automobiles 2. b. personal computers 3. c. dishwashers 4. d. television sets 5. e. all of the above e (Four process strategies, moderate) 36. An assembly line is an example of a 1. a. product-focused process 2. b. process-focused process 3. c. repetitive process 4. d. line process 5. e. specialized process c (Four process strategies, moderate) 37. Standard Register 1. a. has dozens of U.S. plants in its Forms Division 2. b. groups people and machines into departments that perform specific activities 3. c. utilizes a product strategy to keep production volume high 4. d. obtains its low-cost advantage by not spending money on CAD systems 5. e. obtains its low-cost advantage by specializing in a relatively small number of products b (Four process strategies, moderate) 38. Which of the following transformations generally has the highest equipment utilization? 1. a. process-focused process 2. b. repetitive process 3. c. product-focused process 4. d. specialized process 5. e. modular process c (Four process strategies, moderate) 39. Harley Davidson 1. a. utilizes job shops to make each of its modules 2. b. uses product focused manufacturing 3. c. uses a large number of modules to build a small number of different bikes 4. d. uses work cells to feed its assembly line 5. e. All of the above are true. d (Four process strategies, moderate) 40. Which of the following is false regarding repetitive processes? 1. a. They use modules. 2. b. They allow easy switching from one product to the other. 3. c. They are the classic assembly lines. 4. d. They have more structure and less flexibility than a job shop layout. 5. e. They include the assembly of basically all automobiles. b (Four process strategies, moderate) 41. When done correctly, mass customization 1. a. increases pressure on supply chain performance 2. b. helps eliminate the guesswork that comes with sales forecasting 3. c. drives down inventories 4. d. increases pressure on scheduling 5. e. all of the above e (Four process strategies, moderate) 42. Which of the following phrases best describes product focus? 1. a. low volume, high variety 2. b. finished goods are usually made to order 3. c. processes are designed to perform a wide variety of activities 4. d. high fixed costs, low variable costs 5. e. raw material inventories are low relative to the value of the product d (Four process strategies, difficult) 43. Which of the following phrases best describes process focus? 1. a. low volume, high variety 2. b. finished goods are usually made to a forecast and stored 3. c. operators are modestly skilled 4. d. high fixed costs, low variable costs 5. e. raw material inventories are high relative to the value of the product a (Four process strategies, difficult) 44. Which of the following characteristics best describes repetitive focus? 1. a. It uses sophisticated scheduling to accommodate custom orders. 2. b. Its output is a standardized product produced from modules. 3. c. It is too expensive when volumes are low or flexibility is required. 4. d. It is widely used for the manufacture of steel. 5. e. Its costs are often known only after a job is done. b (Four process strategies, difficult) 45. Utilization in process-oriented facilities is frequently low because 1. a. the postponement strategy for improving service productivity is being used 2. b. scheduling in process-oriented facilities is not very complex 3. c. with high fixed costs, utilization is not very important 4. d. excess capacity for peak demands is desirable 5. e. low raw material inventories cause machines to be idled d (Four process strategies, moderate) 46. A quasi-custom product 1. a. gets its apparent customization from the combinations available from a small number of modules 2. b. is often the output of repetitive focus facilities 3. c. is a valid description of a fast food sandwich 4. d. is only possible when the focus strategy of service productivity improvement is in use 5. e. All but d are true. e (Four process strategies, moderate) 47. Process A has fixed costs of $1000 and variable costs of $5 per unit. Process B has fixed costs of $500 and variable costs of $15 per unit. The crossover point between process A and process B is 1. a. 50 units 2. b. 200 units 3. c. $2,500 4. d. $5,000 5. e. $9,500 a (Four process strategies, moderate) {AACSB: Analytic Skills} 48. Process X has fixed costs of $10,000 and variable costs of $2.40 per unit. Process Y has fixed costs of $9,000 and variable costs of $2.25 per unit. Which of the following statements is true? 1. a. The crossover point is approximately 6667 units. 2. b. It is impossible for one process to have both of its costs lower than those of another process. 3. c. Process Y is cheaper than process X at all volumes; there is no crossover point. 4. d. Process X should be selected for very large production volumes. 5. e. Process X is more profitable than process Y and should be selected. c (Four process strategies, moderate) {AACSB: Analytic Skills} 49. The crossover point is that production quantity where 1. a. variable costs of one process equal the variable costs of another process 2. b. fixed costs of a process are equal to its variable costs 3. c. total costs equal total revenues for a process 4. d. total costs for one process equal total costs for another process 5. e. the process no longer loses money d (Four process strategies, moderate) 50. Product Focused processes allow more customization, but are not very efficient are desirable because resource needs increase slowly with the complexity of a process 3. c. are processes that are specialized for relatively few products or customer groups 4. d. apply only to service firms, not to manufacturers 5. e. are profitable because customers demand flexibility, not specialization 1. a. 2. b. c (Process analysis and design, moderate) 51. Value Stream Mapping 1. a. is a variation on time function mapping 2. b. examines the supply chain to determine where value is added 3. c. extends time function mapping back to the supplier 4. d. starts with the customer and works backwards 5. e. All of the above are true. e (Process analysis and design, moderate) 52. One fundamental difference between a process chart and a process map is that 1. a. the process chart uses a time dimension while a process map is not time-oriented 2. b. the process chart includes the supply chain, while the process map stays within an organization 3. c. the process chart is more like a table, while the process map is more like a schematic diagram 4. d. the process chart focuses on the customer and on the provider's interaction with the customer, while the process map does not deal directly with the customer 5. e. None of these is true, because a process chart and a process map are the same thing. c (Process analysis and design, moderate) 53. Service blueprinting 1. a. provides the basis to negotiate prices with suppliers 2. b. mimics the way people communicate 3. c. determines the best time for each step in the process 4. d. focuses on the provider's interaction with the customer 5. e. can only be successful with two-dimensional processes d (Service process and design, moderate) {AACSB: Communication} 54. A drawing of the movement of material, product, or people is a 1. a. flow diagram 2. b. process chart 3. c. service blueprint 4. d. process map 5. e. none of the above a (Process analysis and design, moderate) 55. Strategies for improving productivity in services are 1. a. separation, self-service, automation, and scheduling 2. b. lean production, strategy-driven investments, automation, and process focus 3. c. reduce inventory, reduce waste, reduce inspection, and reduce rework 4. d. high interaction, mass customization, service factory, and just-in-time 5. e. none of the above a (Service process design, moderate) 56. In mass service and professional service, the operations manager should focus on 1. a. automation 2. b. equipment maintenance 3. c. sophisticated scheduling 4. d. human resources 5. e. all of the above d (Service process design, moderate) 57. In mass service and service factory quadrants of the service process matrix, the operations manager could focus on all of the following except 1. a. automation 2. b. standardization 3. c. tight quality control 4. d. removing some services 5. e. customization e (Service process design, moderate) 58. 1. 2. 3. 4. 5. Which of the following is true regarding opportunities to improve service processes? a. Automation can do little to improve service processes, because services are so personal. b. Layout is of little consequence, since services seldom use an assembly line. c. If a work force is strongly committed, it need not be cross-trained and flexible. d. All of the above are true. e. None of the above is true. e (Service process design, moderate) 59. 1. 2. 3. 4. 5. Which of the following are typical of process control systems? a. They have sensors. b. The digitized data are analyzed by computer, which generates feedback. c. Their sensors take measurements on a periodic basis. d. The sensors' measurements are digitized. e. all of the above e (Production technology, moderate) {AACSB: Use of IT} 60. Which of the following is true regarding vision systems? 1. a. They are consistently accurate. 2. b. They are modest in cost. 3. c. They do not become bored. 4. d. All of the above are true. 5. e. None of the above is true. d (Production technology, moderate) {AACSB: Use of IT} 61. The use of information technology to monitor and control a physical process is known as 1. a. process control 2. b. computer-aided design 3. c. information numeric control 4. d. numeric control 5. e. none of the above a (Production technology, moderate) {AACSB: Use of IT} 62. Which of the following technologies would enable a cashier to scan the entire contents of a shopping cart in seconds? 1. a. ASRS 2. b. AGV 3. c. CAD/CAM 4. d. RFID 5. e. FMS d (Production technology, moderate) {AACSB: Use of IT} "Automatic placement and withdrawal of parts and products into and from designated places in a warehouse" describes 1. a. AGV 2. b. CAD/CAM 3. c. CIM 4. d. ASRS 5. e. FMS d (Production technology, moderate) {AACSB: Use of IT} 63. 64. Computer-integrated manufacturing (CIM) includes manufacturing systems that have 1. a. computer-aided design, a flexible manufacturing system, inventory control, warehousing and shipping integrated 2. b. transaction processing, management information systems, and decision support systems integrated 3. c. automated guided vehicles, robots, and process control 4. d. robots, automated guided vehicles, and transfer equipment 5. e. all of the above a (Production technology, moderate) {AACSB: Use of IT} 65. Which one of the following technologies is used only for material handling, not actual production or assembly? 1. a. robots 2. b. CNC 3. c. CAD 4. d. AGVs 5. e. FMS d (Production technology, moderate) {AACSB: Use of IT} 66. A system using an automated work cell controlled by electronic signals from a common centralized computer facility is called a(n) 1. a. adaptive control system 2. b. robotics 3. c. flexible manufacturing system 4. d. automatic guided vehicle (AGV) system 5. e. manufacturing cell c (Production technology, moderate) {AACSB: Use of IT} 67. 1. 2. 3. 4. 5. "Operators simply load new programs, as necessary, to produce different products" describes a. CAD b. automated guided vehicles c. flexible manufacturing systems d. vision systems e. process control c (Production technology, moderate) {AACSB: Use of IT} 68. Which of the following is not one of the essential ingredients for mass customization? 1. a. high machine utilizations 2. b. personnel and facility flexibility 3. c. reliance on modular design 4. d. rapid throughput 5. e. very effective scheduling a (Four process strategies, moderate) 69. Advances in technology 1. a. have impacted the manufacturing sector only 2. b. have had only limited impact on services 3. c. have failed to change the level of customer interaction with an organization 4. d. have had dramatic impact on customer interaction with services and with products 5. e. have dramatically changed health care, but have not changed retailing d (Technology in services, moderate) 70. Process redesign 1. a. is the fundamental rethinking of business processes 2. b. can focus on any process 3. c. tries to bring about dramatic improvements in performance 4. d. focuses on activities that cross functional lines 5. e. all of the above e (Process reengineering, moderate) 71. Ethical and environmentally friendly processes include which of the following? 1. a. emission controls 2. b. recycling 3. c. efficient use of resources 4. d. reduction of waste by-products 5. e. all of the above e (Technology in services, moderate) {AACSB: Ethical Reasoning} 72. Making environmentally sound products through efficient processes 1. a. is unprofitable, as long as recyclable materials prices are soft 2. b. is known as lean manufacturing 3. c. can still be profitable 4. d. is easier for repetitive processes than for product-focused processes 5. e. none of the above c (Ethical and environmentally friendly processes, moderate) {AACSB: Ethical Reasoning} 73. Flexibility can be achieved with 1. a. movable equipment 2. b. inexpensive equipment 3. c. sophisticated electronic equipment 4. d. modular equipment 5. e. all of the above 74. e (Selection of equipment and technology, moderate) Which of the following statements regarding ethical and environmentally friendly processes is true? 1. a. Operations managers can be environmentally sensitive, but they must avoid following a low cost strategy. 2. b. Processes can be environmentally friendly or socially responsible, but not both. 3. c. Operations managers can be environmentally sensitive and still follow a low cost strategy. 4. d. Using energy-efficient lighting saves so little that it should not be labeled environmentally friendly. 5. e. The only business strategy consistent with ethical and environmentally sensitive management is the differentiation strategy. c (Ethical and environmentally friendly processes, moderate) {AACSB: Ethical Reasoning} 75. Which of the following is true regarding the concept of flexibility? 1. a. It is the ability to change production rates with little penalty in time, cost, or customer value. 2. b. It can be accomplished with sophisticated electronic equipment. 3. c. It may involve modular, movable, even cheap equipment. 4. d. All of the above are true. 5. e. None of the above is true. d (Selection of equipment and technology, moderate) FILL-IN-THE-BLANK 76. An organization's approach to transforming resources into goods and services is called its _____________. process strategy (Introduction, moderate) The process strategy that is organized around processes to facilitate low-volume, highvariety processes is called a(n) ________________. process focus (Four process strategies, moderate) ______________ is a process strategy that uses a product-oriented production process that uses modules. Repetitive focus (Four process strategies, moderate) ____________ is a rapid, low-cost production process that caters to constantly changing unique customer desires. Mass customization (Four process strategies, moderate) _____________ represent an organization's attempt to gain increased efficiency through specialization, which can include, for example, concentrating on certain classes of customers. Focused processes (Four process strategies, moderate) A(n) _______________ uses symbols to analyze the movement of people or material. process chart (Process analysis and design, easy) A special form of time-function mapping, which goes beyond the organization into its supply chain, is _____________. value stream mapping (Process analysis and design, moderate) ______________ is a process analysis technique that focuses on the customer and the producer's interaction with the customer. Service blueprinting (Process analysis and design, easy) The strategy for improving service productivity that customizes at delivery, rather than at production, is _____________. postponement (Service process design, moderate) ___________ involves the ability to respond with little penalty in time, cost, or customer value. Flexibility (Selection of equipment and technology, moderate) __________ is the use of information technology to control a physical process. Process control (Production technology, moderate) {AACSB: Use of IT} ___________ is a computer-controlled warehouse that provides for the automatic placement of parts into and from designated places within the warehouse. Automated storage and retrieval system or ASRS (Production technology, moderate) {AACSB: Use of IT} A(n) __________ uses an automated work cell controlled by electronic signals from a common centralized computer facility. flexible manufacturing system or FMS (Production technology, moderate) {AACSB: Use of IT} 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. _______________ is the fundamental rethinking and radical redesign of business processes to bring about dramatic improvements in performance. Process reengineering (Process redesign, moderate) SHORT ANSWERS 90. What is Dell Computer's source of competitive advantage? In a short paragraph, explain some of the steps Dell has taken to develop this advantage. Dell's competitive advantage is in its process strategy, which is mass customization. Dell spends most of its research budget on efficient installation and configuration of PCs, rather than on new computer parts. Dell builds PCs only when ordered. Dell utilizes various methods to keep inventory low. Dell utilizes the Internet to enhance productivity (Global company profile, moderate) Why is Harley-Davidson identified as a repetitive manufacturer, not a mass customizer? Harley-Davidson manufactures a variety of motorcycles on an assembly line. They are not a product-focused process. While Harley-Davidson's motorcycles display lots of variety, they are not as individualized as Dell's personal computers. The variety comes from choices in predefined modules, and there is apparently no place for a customer to get customization that would go beyond what is available in these modules. (Four process strategies, moderate) What is the link between focused processes and specialization? What kinds of focus are possible? Focused processes are a means of obtaining increased productivity through forms of specialization. Focus can take several forms, including concentrating on specific classes of customers, working only with products in selected product families, specializing in a specific service, or working with a narrow range of technology. (Four process strategies, moderate) Describe Value Stream Mapping. Explain how it is different from process mapping. Value Stream Mapping is a variation on time-function mapping or process mapping. The most fundamental difference between them is that Value Stream Mapping is not confined to the organization itself. In particular, in its analysis of where value is added, it extends the analysis to the organization's supply chain. (Process analysis and design, moderate) How are modules useful in manufacturing processes? Modules are parts or components of a product previously prepared. By using modules, the product can be quickly assembled. Using a different combination of modules allows for quasi-customization. (Four process strategies, moderate) What is mass customization? Mass customization is rapid, low-cost production of goods and services that fulfill increasingly unique customer desires. It brings us the variety of products traditionally provided by the process focus, with low costs associated with standardized high volume production (the product focus). (Four process strategies, moderate) Name the four basic process strategies; describe them in a complete sentence or two each. The four process strategies are process focus, product focus, repetitive focus, and mass customization. Process is a job shop--high variety and low volume; repetitive is an 91. 92. 93. 94. 95. 96. assembly line--relatively standardized products with options from modules; product is for high volume, low variety, such as oil refining, flour milling; mass customization is for high volume, high variety. (Four process strategies, moderate) 97. Why is equipment utilization in process-focused service industries often low? Equipment utilization is low because excess capacity to meet peak demand loads is often desirable, and scheduling is typically difficult. (Four process strategies, moderate) Compare an intermittent process to a continuous process on the basis of variety, volume, equipment utilization, and inventory. Intermittent has high variety, low volume, low utilization, general purpose equipment. Since most output is made to order, there is little inventory of raw materials or finished goods. Continuous has low variety, high volume, high utilization, and specialized equipment. Just-intime practices keep inventory very low. (Four process strategies, moderate) 98. 99. The textbook described four basic process models, and hinted that there are others. Construct an example of a hybrid process. Can this process be applied in any well-known organization? How common do you think hybrid processes are? Most students will graft elements of process onto elements of product or repetitive. Examples may include food service, where "process" may typify most operations, but salad bars add an element of "repetitive." In health care, hybrids of process and repetitive can readily be found. (Four process strategies, moderate) {AACSB: Reflective Thinking} 100. In an affluent society, how do we produce a wide number of options for products at low cost? In an affluent society we produce a wide variety of options for products at low cost, primarily by use of modular components assembled in repetitive facilities, but automation is allowing more overlap of different types of production processes. (Four process strategies, moderate) 101. Name the tools of process analysis and design. Describe them in a sentence or two each. Four tools of process analysis and design include flow diagrams, time-function mapping, process charts, and service blueprinting. Flow diagrams are a schematic or drawing of the movement of material, product, or people. Time-function mapping is a flow diagram, with the addition of time on the horizontal axis. Process charts use symbols, time, and distance to provide an objective and structured way to analyze and record the activities that make up a process. Service blueprinting focuses on the customer and the provider's interaction with the customer. (Process analysis and design, moderate) 102. Provide an example of the focus strategy for improving service productivity. The focus strategy refers to restricting the offerings. Examples will vary, but a restaurant with a limited menu would be one example. (Service process design, moderate) 103. Provide an example of the postponement strategy for improving service productivity. The postponement strategy refers to customizing the product at delivery, not at production. Examples will vary, but a home builder might leave some tasks unfinished until the house is sold, so that the buyer can make those final decisions. Carpeting, paint colors, cabinet doors, and some appliance choices might be good examples. (Service process design, moderate) 104. Identify the typical elements in a process control system. Sensors collect data; analog devices read data on a periodic basis; measurements are digitized and transmitted to a computer; data are analyzed; and output occurs in the form of signals, diagrams, charts, messages, etc. (Production technology, moderate) {AACSB: Use of IT} 105. Identify the advances being made in technology to enhance production. Technology used to enhance production include numerical control, process control, vision systems, robots, automated storage and retrieval systems, automated guided vehicles, flexible manufacturing systems, and computer integrated manufacturing. (Production technology, moderate) {AACSB: Use of IT} 106. Identify the techniques for improving service productivity. For any two techniques, describe in a short paragraph, and include an example. The seven techniques are separation, selfservice, postponement, focus, modules, automation, scheduling, and training. . Separation: structuring the service such that the customer must go where the service is offered (a medical facility) . Self-service: let customers perform their own comparisons (supermarket shopping) . Postponement: customizing at time of delivery or in the final stages of the process (dealer installed versus factory installed options on automobiles, boats, etc.; Wendy's Hamburgers) . Focus: restricting the product offerings, options, or degree of customization allowed (limited number of factory installed options on a new automobile) . Modules: services selected from modular choices (health insurance programs) . Automation: identifying services that may lend themselves to automation (automatic teller machines) . Scheduling: precise personnel scheduling (keep close watch on how many checkout lanes are needed) . Training: clarifying options, teaching problem avoidance (maintenance personnel, counselors) (Service process design, difficult) 107. Explain, in your own words, what a flexible manufacturing system is. List the benefits of flexible manufacturing systems. An FMS is a system using an automated work cell controlled by electronic signals from a common centralized computer facility. Benefits of an FMS include improved capital utilization, low direct labor cost, reduced inventory, and consistent quality. (Production technology, moderate) {AACSB: Use of IT} 108. Describe some major challenges to implementing a successful build-to-order system? Product design must be imaginative and fast. Process design must be rapid, flexible, and able to accommodate changes in design and technology. Inventory management requires tight control. Tight schedules that track orders and material from design through delivery can be effectively implemented only with dedicated personnel. Responsive partners in the supply chain yield effective collaboration. (Four process strategies, moderate) 109. Identify five examples of technology's impact on services. Specifically, identify one of these that has led to labor cost reductions. Discuss briefly. Can you add an item, not identified in the textbook, to this list? Textbook identifies about three dozen examples. Students may add examples like PointCast (or other "push" information technologies), Amazon.com (fully electronic Internet-based shopping), or examples from entertainment (video gaming, network gaming). (Technology in services, moderate) {AACSB: Use of IT} 110. Why do modern operations managers look for flexibility in their equipment? Flexibility in equipment provides managers the ability to respond to changes in demand with little penalty in time, cost, or customer value. (Selection of equipment and technology, moderate) 111. How are environmental issues linked to the process choice? Won't being an environmentally conscious firm drive up costs and take away any competitive advantage? Discuss, with examples to support your position. Environmental issues are directly on point in the process decision. The process choice selects equipment that has emissions, creates waste in work or in packaging, etc. Not all environmentally conscious activities are costadding. But even if they were, cost is not the only thing affected. Customers may be attracted to products that are made from recycled materials, or that are more recyclable. This translates into revenue enhancement, not an element of cost. The competitive advantage centers on the customer, not the cost. (Environmentally friendly processes, moderate) {AACSB: Ethical Reasoning} PROBLEMS 112. A product is currently made in a process-focused shop, where fixed costs are $9,000 per year and variable cost is $50 per unit. The firm is considering a fundamental shift in process, to repetitive manufacture. The new process would have fixed costs of $90,000, and variable costs of $5. What is the crossover point for these processes? For what range of outputs is each process appropriate? The crossover is at 1800 units annually. For volumes under 1800, the process focus is cheaper; for volumes over 1800 units, the repetitive focus is cheaper. (Four process choices, moderate) {AACSB: Analytic Skills} 113. Big John's Manufacturing currently produces its lead product on a machine that has a variable cost of $0.32 per unit, and fixed costs of $75,000. Big John is considering purchasing a new machine that will drop the variable cost to $.28 per unit, but has a fixed cost of $150,000. What is the crossover point between the two machines? 1,875,000 units (Four process choices, moderate) {AACSB: Analytic Skills} 114. The local convenience store makes personal pan pizzas. Currently, their process makes complete pizzas, fully cooked, for the customer. This process has a fixed cost of $20,000, and a variable cost of $1.75 per pizza. The owner is considering a different process that can make pizzas in two ways: completely cooked (as before), or partially cooked and then flash frozen, for the customer to finish at home. This alternate process has a fixed cost of $24,000, but a lower variable cost (because much less energy is used in baking) of $1.25 per pizza. 1. a. What is the crossover point between the existing process and the proposed process? 2. b. If the owner expects to sell 9,000 pizzas, should he get the new oven? (a) the crossover is 8,000 units (b) for production quantities of 8,000 or larger, the new, more flexible process has lower cost. (Four process choices, moderate) {AACSB: Analytic Skills} 115. A firm is about to undertake the manufacture of a product, and is weighing the process configuration options. There are two intermittent processes under consideration, as well as a repetitive focus. The smaller intermittent process has fixed costs of $3,000 per month, and variable costs of $10 per unit. The larger intermittent process has fixed costs of $12,000 and variable costs of $2 per unit. A repetitive focus plant has fixed costs of $50,000 and variable costs of $1 per unit. 1. a. At what output does the large intermittent process become cheaper than the small one? 2. b. At what output does the repetitive process become cheaper than the larger intermittent process? (a) at 1125 units, the large job shop becomes cheaper than the small job shop; (b) at 38,000 units, the repetitive shop is cheaper than the larger job shop. (Four process choices, moderate) {AACSB: Analytic Skills} 116. An organization is considering three process configuration options. There are two different intermittent processes, as well as a repetitive focus. The smaller intermittent process has fixed costs of $3,000 per month, and variable costs of $10 per unit. The larger intermittent process has fixed costs of $12,000 per month and variable costs of $2 per unit. A repetitive focus plant has fixed costs of $50,000 and variable costs of $1 per unit. 1. a. If the company produced 20,000 units, what would be its cost under each of the three choices? 2. b. Which process offers the lowest cost to produce 40,000 units? What is that cost? (a) at 20,000 units, the costs are small intermittent = $203,000; large intermittent = $52,000; and repetitive = $70,000 (b) at 40,000 units, repetitive process is cheapest, at $90,000 (small intermittent = $403,000, and large intermittent = $92,000). (Four process choices, moderate) {AACSB: Analytic Skills} 117. A product is currently made in a process-focused shop, where fixed costs are $8,000 per year and variable cost is $40 per unit. The firm currently sells 200 units of the product at $200 per unit. A manager is considering a repetitive focus to lower costs (and lower prices, thus raising demand). The costs of this proposed shop are fixed costs = $24,000 per year and variable costs = $10 per unit. If a price of $80 will allow 400 units to be sold, what profit (or loss) can this proposed new process expect? Do you anticipate that the manager will want to change the process? Explain. Old: TR = $40,000, TC = $16,000, therefore Profit = $24,000. New: TR = $80 x 400 = $32,000, TC = $24,000 + $10 x 400 = $28,000, for a profit of $4,000. Most will say NO; the larger repetitive process is less profitable than the smaller processfocused shop. (Four process choices, moderate) {AACSB: Analytic Skills} 118. Mary is considering purchasing a machine from two suppliers. Supplier As machine has an annual fixed cost of $10,000 and a unit variable cost of $2.10. Supplier Bs machine has an annual fixed cost of $16,000 and a unit variable cost of $3.00. How large should Marys annual demand be in order to make Supplier Bs machine the best choice? The answer is that there is no demand for which Supplier Bs machine will be best. The crossover point is -6667 units. (Four process choices, moderate) {AACSB: Analytic Skills} SUPPLEMENT PLANNING TRUE/FALSE 1. 7: CAPACITY Utilization is the number of units a facility can hold, receive, store, or produce in a period of time. False (Capacity, easy) Design capacity is the theoretical maximum output of a system in a given period under ideal conditions. True (Capacity, moderate) Capacity decisions are based on technological concerns, not demand forecasts. False (Capacity, easy) Expected output is sometimes referred to as rated capacity. True (Capacity, moderate) Price changes are useful for matching the level of demand to the capacity of a facility. True (Capacity, moderate) A useful tactic for increasing capacity is to redesign a product in order to get more throughput. True (Capacity, moderate) Changes in capacity may lead, lag, or straddle the demand. True (Capacity planning, moderate) Building an additional warehouse is an incremental expansion, not a one-step expansion. False (Capacity planning, moderate) Fixed costs are those costs that continue even if no units are produced. True (Break-even analysis, moderate) Break-even analysis identifies the volume at which fixed costs and revenue are equal. False (Break-even analysis, moderate) Break-even analysis is a powerful analytical tool, but is useful only when the organization produces a single product. False (Break-even analysis, moderate) A decision tree indicates at what quantity profit changes from negative to positive. False (Break-even analysis, moderate) 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. A decision tree for analyzing capacity would have future demands or market favorability as the decision alternatives. False (Applying decision trees to capacity decisions, moderate) One limitation of the net present value approach to investments is that investments with identical net present values may have very different cash flows. True (Applying investment analysis to strategy-driven investments, moderate) The net present value of $10,000 to be received in exactly three years is considerably greater than $10,000. False (Applying investment analysis to strategy-driven investments, easy) 14. 15. MULTIPLE CHOICE 16. What is sometimes referred to as rated capacity? 1. a. efficiency 2. b. utilization 3. c. effective capacity 4. d. expected output 5. e. design capacity d (Capacity, moderate) 17. 1. 2. 3. 4. 5. Effective capacity is the a. maximum output of a system in a given period b. 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 e. sum of all of the organization's inputs b (Capacity, moderate) 18. Which the of following represents an aggressive approach to demand management in the service sector when demand and capacity are not particularly well matched? 1. a. inexpensive rates for weekend phone calls 2. b. appointments 3. c. reservations 4. d. first-come, first-served 5. e. none of the above a (Capacity, moderate) 19. 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 1900 students per semester and the utilization is 90%. If the number of students who actually got their orientation session is 1500, what is the efficiency of the system? 1. a. 1350 students 2. b. 1710 students 3. c. 75% 4. d. 87.7% 5. e. 90% 20. d (Capacity, moderate) {AACSB: Analytic Skills} Christophers Cranks uses a machine that can produce 100 cranks per hour. The firm operates 12 hours per day, five days per week. Due to regularly scheduled preventive maintenance, the firm expects the machine to be running during approximately 95% of the available time. Based on experience with other products, the firm expects to achieve an efficiency level for the cranks of 85%. What is the expected weekly output of cranks for this company? 1. a. 5100 2. b. 5700 3. c. 4845 4. d. 969 5. e. 6783 c (Capacity, moderate) {AACSB: Analytic Skills} 21. The staff training center at a large regional hospital provides training sessions in CPR to all employees. Assume that the capacity of this training system was designed to be 1200 employees per year. Since the training center was first put in use, the program has become more complex, so that 1050 now represents the most employees that can be trained per year. In the past year, 950 employees were trained. The efficiency of this system is approximately _____ and its utilization is approximately _____. 1. a. 79.2 percent; 90.5 percent 2. b. 90.5 percent; 79.2 percent 3. c. 87.5 percent; 950 employees 4. d. 950 employees; 1050 employees 5. e. 110.5 percent; 114.3 percent b (Capacity, moderate) {AACSB: Analytic Skills} 22. 1. 2. 3. 4. 5. Which of the following represents a common way to manage capacity in the service sector? a. appointments b. reservations c. changes in staffing levels d. first-come, first served service rule e. early bird specials in restaurants c (Capacity, easy) 23. If demand exceeds capacity at a new facility, an organization can use which of the following to move demand to an existing facility? 1. a. aggressive marketing 2. b. lower prices at all facilities 3. c. build a facility of the correct size 4. d. add a complementary product 5. e. reduce lead times 24. a (Capacity, moderate) Adding a complementary product to what is currently being produced is a demand management strategy used when 1. a. demand exceeds capacity 2. b. capacity exceeds demand for a product which has stable demand 3. c. the existing product has seasonal or cyclical demand 4. d. price increases have failed to bring about demand management 5. e. efficiency exceeds 100 percent c (Capacity, moderate) 25. An organization whose capacity is on that portion of the average unit cost curve that falls as output rises 1. a. has a facility that is below optimum operating level and should build a larger facility 2. b. has a facility that is above optimum operating level and should build a smaller facility 3. c. is suffering from diseconomies of scale 4. d. has utilization higher than efficiency 5. e. has efficiency higher than utilization a (Capacity, moderate) 26. Of the four approaches to capacity expansion, the approach that "straddles" demand 1. a. uses incremental expansion 2. b. uses one-step expansion 3. c. at some times leads demand, and at other times lags 4. d. works best when demand is not growing but is stable 5. e. Choices a and c are both correct. e (Capacity, moderate) Which of the following is not one of the four approaches to capacity expansion? 1. a. average capacity with incremental expansion 2. b. lead demand with incremental expansion 3. c. lag demand with incremental expansion 4. d. lead demand with one-step expansion 5. e. lag demand with one-step expansion e (Capacity, moderate) 28. Which of the following is false regarding capacity expansion? 27. 1. a. "Average" capacity sometimes leads demand, sometimes lags it. 2. b. If "lagging" capacity is chosen, excess demand can be met with overtime or subcontracting. 3. c. Total cost comparisons are a rather direct method of comparing capacity alternatives. 4. d. Capacity may only be added in large chunks. 5. e. All of the above are true. d (Capacity, moderate) 29. Break-even is the number of units at which 1. a. total revenue equals price times quantity 2. b. total revenue equals total variable cost 3. c. total revenue equals total fixed cost 4. d. total profit equals total cost 5. e. total revenue equals total cost e (Break-even analysis, moderate) Which of the following statements regarding fixed costs is true? 1. a. Fixed costs rise by a constant amount for every added unit of volume. 2. b. While fixed costs are ordinarily constant with respect to volume, they can "step" upward if volume increases result in additional fixed costs. 3. c. Fixed costs are those costs associated with direct labor and materials. 4. d. Fixed costs equal variable costs at the break-even point. 5. e. Fixed cost is the difference between selling price and variable cost. b (Break-even analysis, moderate) 31. Which of the following costs would be incurred even if no units were produced? 1. a. raw material costs 2. b. direct labor costs 3. c. transportation costs 4. d. building rental costs 5. e. purchasing costs d (Break-even analysis, moderate) 32. Basic break-even analysis typically assumes that 1. a. revenues increase in direct proportion to the volume of production, while costs increase at a decreasing rate as production volume increases 2. b. variable costs and revenues increase in direct proportion to the volume of production 3. c. both costs and revenues are made up of fixed and variable portions 4. 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 5. e. All of the above are assumptions in the basic break-even model. b (Break-even analysis, difficult) 30. 33. 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 1. a. $90,000 dollars 2. b. 90,000 units 3. c. $15,000 dollars 4. d. 15,000 units 5. e. cannot be calculated from the information provided d (Break-even analysis, moderate) {AACSB: Analytic Skills} 34. 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 5000 units, which machine should be purchased? 1. a. machine A 2. b. machine B 3. c. either machine A or machine B 4. d. no purchase because neither machine yields a profit at that volume 5. e. purchase both machines since they are both profitable d (Break-even analysis, moderate) {AACSB: Analytic Skills} 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 1. a. 4,000 units, with A more profitable at low volumes 2. b. 4,000 dollars, with A more profitable at low volumes 3. c. 4,000 units, with B more profitable at low volumes 4. d. 4,000 dollars, with B more profitable at low volumes 5. e. none of the above c (Break-even analysis, moderate) {AACSB: Analytic Skills} 35. 36. 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? 1. a. machine A 2. b. machine B 3. c. either machine A or machine B 4. d. no purchase because neither machine yields a profit at that volume 5. e. purchase both machines since they are both profitable d (Break-even analysis, moderate) {AACSB: Analytic Skills} 37. Break-even analysis can be used by a firm that produces more than one product, but 1. a. the results are estimates, not exact values 2. b. the firm must allocate some fixed cost to each of the products 3. c. each product has its own break-even point 4. d. the break-even point depends upon the proportion of sales generated by each of the products 5. e. None of these statements is true. d (Break-even analysis, moderate) 38. The basic break-even model can be modified to handle more than one product. This extension of the basic model requires 1. a. price and sales volume for each product 2. b. price and variable cost for each product, and the percent of sales that each product represents 3. c. that the firm have very low fixed costs 4. d. that the ratio of variable cost to price be the same for all products 5. e. sales volume for each product b (Break-even analysis, moderate) A product sells for $5, and has unit variable costs of $3. This product accounts for $20,000 in annual sales, out of the firm's total of $60,000. The weighted contribution of this product is approximately 1. a. 0.133 2. b. 0.200 3. c. 0.40 4. d. 0.667 5. e. $1.667 a (Break-even analysis, moderate) {AACSB: Analytic Skills} 40. When decision trees are used to analyze capacity decisions, 1. a. "do nothing" is not a possible decision alternative 2. b. probabilities must be assigned to each of the decision alternatives 3. c. states of nature are often demand-based, as in "market favorability" 4. d. states of nature must be known with certainty 5. e. fixed costs are not relevant c (Applying decision trees to capacity decisions, moderate) 41. Net present value 39. 1. a. is gross domestic product less depreciation 2. b. is sales volume less sales and excise taxes 3. c. is profit after taxes 4. d. ignores the time value of money 5. e. is the discounted value of a series of future cash receipts e (Applying investment analysis to strategy-driven investments, moderate) 42. 1. 2. 3. 4. 5. 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 $1200 than for twelve monthly receipts of $100 each d. for a 4% discount rate than for a 6% discount rate e. All of the above are true. d (Applying investment analysis to strategy-driven investments, moderate) 43. A capacity alternative has an initial cost of $50,000 and cash flow of $20,000 for each of the next four years. If the cost of capital is 5 percent, the net present value of this investment is 1. a. greater than $80,000 2. b. greater than $130,000 3. c. less than $30,000 4. d. impossible to calculate, because no interest rate is given 5. e. impossible to calculate, because variable costs are not known c (Applying investment analysis to strategy-driven investments, moderate) {AACSB: Analytic Skills} 44. A capacity alternative has an initial cost of $50,000 and cash flow of $20,000 for each of the next four years. If the cost of capital is 5 percent, the net present value of this investment is approximately 1. a. $20,920 2. b. $26,160 3. c. $49,840 4. d. $70,920 5. e. $106,990 a (Applying investment analysis to strategy-driven investments, moderate) {AACSB: Analytic Skills} FILL-IN-THE-BLANK 45. 46. 47. ____________ is the amount a facility can hold, store, receive, or produce in a period of time. Throughput or Capacity (Capacity, moderate) ____________ is actual output as a percent of design capacity. Utilization (Capacity, moderate) ____________ is actual output as a percent of effective capacity. Efficiency (Capacity, moderate) 48. 49. In the service sector, scheduling customers is ____________, and scheduling the workforce is ____________. demand management; capacity management (Capacity, moderate) The capacity planning strategy that delays adding capacity until capacity is below demand, then adds a capacity increment so that capacity is above demand, is said to____________ demand. average or straddle (Capacity, moderate) _______________ analysis finds the point at which cost equals revenues. Break-even (Break-even analysis, moderate) _________ cost is the cost that continues even if no units are produced. Fixed (Break-even analysis, moderate) Multiproduct break-even analysis calculates the __________ of each product, __________ it in proportion to each product's share of total sales. contribution; weighting (Break-even analysis, moderate) _____________ is a means of determining the discounted value of a series of future cash receipts. Net present value or NPV (Applying investment analysis to strategy-driven investments, moderate) 50. 51. 52. 53. SHORT ANSWERS 54. Some organizations use number of beds, number of rooms, or room size to measure capacity. There's no time period in this capacity, and no "throughput." Why are these firms using such a different concept of capacity? Student answers will vary, since the answer is not explicitly covered in text. But it is a natural extension of what students know about services. It's easy for Krispy Kreme to say they produced 40,000 doughnuts in a day. But these firms may deliver services that are hard to quantify or add up, perhaps because each service is unique. So rather than measure produced output, they focus on certain inputs that are critical to their ability to serve customers. (Capacity, difficult) {AACSB: Reflective Thinking} What is the fundamental distinction between design capacity and effective capacity? Provide a brief example. Design capacity is the theoretical maximum output of a system in a given period under ideal conditions. Effective capacity, on the other hand, is the capacity that a firm expects to achieve given the current operating constraints. Effective capacity is often lower than design capacity because the facility may have been designed for an earlier version of the product or a different product mix than is currently being produced. As an example, a restaurant might have 100 seats, but it only opens up 60 every night because it cannot find enough qualified servers. (Capacity, moderate) Distinguish between utilization and efficiency. Both are ratios, not item counts. Both use actual output in the ratio numerator. Utilization is the ratio of actual output to design capacity, so it measures output as a fraction of ideal facility usage. Efficiency is the ratio 55. 56. of actual output to effective capacity, so it measures output as a fraction of the practical or current limits of the facility. (Capacity, moderate) 57. Why is the capacity decision important? The capacity decision is important for several reasons. First, capacity costs represent a large portion of fixed costs. Second, a facility of the wrong size means that costs are not as low as they could be. If a facility is too large, and portions of it remain idle, the firm's costs are too high because of the higher fixed costs. If a plant is too small, costs are again higher than they might be due to inefficiencies of working in cramped and crowded spaces. Further, a facility too small may lead to lost sales, perhaps even lost markets. (Capacity, moderate) A good capacity decision requires that it be tightly integrated with the organization's strategy and investments. But there are other "considerations" to making a good capacity decision. Name them. Describe each in a sentence or two. The four considerations are forecast demand accurately, understand the technology and capacity increments, find the optimum operating level (volume), and build for change. Without a good demand forecast, no firm can expect to build a facility of the proper size. In some cases capacity can be obtained in small amounts, but in others, to add capacity might require an entire building or production line. There is an optimum operating level, at which average unit costs are least. That volume is found through the analysis of economic cost curves. Finally, the firm needs a plan for adding capacity as demand grows; this plan can lead demand, lag demand, or straddle demand. (Capacity, moderate) A sugar mill receives sugar cane from farmers, extracts the juice, boils it into syrup, and then crystallizes the syrup into raw sugar. There has been an ongoing consolidation of sugar mills, and an increase in the capacity of those that remain. The number of mills in Louisiana was 48 in the 1960s, was 18 in 1999 and is currently 13. In 1999 the break-even point for a typical mill was 600,000 tons. But as the surviving mills have added capacity, the break-even point is now 1,000,000 tons. In 1999, the state's farmers produced 16,000,000 tons of cane, but by 2004, the crop was down to 13,000,000 tons. Analyze this situation with what you have learned about the capacity decision. Is the industry better off with fewer but larger mills, or not? There are several possible paths students can take. The most obvious is the economic argument that economies of scale call for ever larger plants. Students may want to address the lead, lag, or straddle strategies of growing to meet demand. But demand is not growing very much it's up from 890,000 tons per mill to 1,000,000 tons per mill over 5 years. Students may alternately try to analyze the considerations of matching capacity to demand, and describe pricing strategies or internal changes to meet demand. But the broadest view suggests that the industry (not individual mills!) operated somewhat above break-even in 1999, but is squarely at break-even now. The increased capacities do not seem much of an improvement. This question is drawn from an article in the New Orleans Times-Picayune, 30 January 2005. (Capacity, difficult) {AACSB: Reflective Thinking} Identify the tactics for matching capacity to demand. 1. Making staffing changes (increasing or decreasing the number of employees), 2. Adjusting equipment (purchasing additional machinery or selling or leasing out existing equipment), 3. Improving processes to increase throughput, 4. Redesigning products to facilitate more throughput, 5. Adding process flexibility to better meet changing product preferences, and 6. Closing facilities. (Capacity, moderate) 58. 59. 60. 61. 62. Define fixed costs. Fixed costs are those that continue even if no units are produced. (Break-even analysis, moderate) Define variable costs. What special assumption is made about variable costs in the textbook? Variable costs are those that vary with the number of units produced, linearity, or proportionality. (Break-even analysis, moderate) How is break-even analysis useful in the study of the capacity decision? What limitations does this analytical tool have in this application? Breakeven is defined as the volume for which cost equals revenue. It is useful to know the break-even point for each capacity alternative under consideration. In reality, costs may not be as linear as they are assumed to be in this model. (Break-even analysis, moderate) 63. 64. Describe how a decision tree might be used to analyze a capacity decision. The starting node of the tree is the capacity decision itself. There will be one branch from this node for each decision alternative (capacity choice). Each choice may have states of nature attached to it, such as whether demand is high or low. These states of nature will have probabilities assigned, and each terminal branch of the tree must be assigned a payoff. The expected value of each decision alternative is calculated, and the highest expected value chosen as the best capacity choice. (Applying decision trees to capacity decisions, moderate) 65. What are the assumptions of the net present value technique? The assumptions of the net present value technique are: . Interest rates are known for the entire term of the investment. . Payments are made at the end of each time period. . Investments with similar net present values are similar in other respects (at least, we make this assumption if net present value is the only method of evaluation of investment used). (Applying investment analysis to strategy-driven investments, moderate) PROBLEMS 66. The staff training center at a large regional hospital provides training sessions in CPR to all employees. Assume that the capacity of this training system was designed to be 1800 employees per year. Since the training center was first put in use, the program has become more complex, so that 1400 now represents the most employees that can be trained per year. In the past year, 1350 employees were trained. Calculate the efficiency and the utilization of this system. Efficiency = 1350 / 1400 = .964 or 96.4 percent; utilization = 1350 / 1800 = .75 or 75 percent (Capacity, moderate) {AACSB: Analytic Skills} An executive conference center has the physical ability to handle 1,100 participants. However, conference management personnel believe that only 1,000 participants can be handled effectively for most events. The last event, although forecasted to have 1,000 participants, resulted in the attendance of only 950 participants. What are the utilization and efficiency of the conference facility? Design Capacity = 1,100 participants Effective Capacity = 1,000 participants Actual Output = 950 participants 67. acutal output 950 Utilization = == 86 .4% design capacity 1,100 Efficiency = actual output = 950 = 95.0% effective capacity 1000 (Capacity, moderate) {AACSB: Analytic Skills} 68. 1. 2. 3. A fleet repair facility has the capacity to repair 800 trucks per month. However, due to scheduled maintenance of their equipment, management feels that they can repair no more than 600 trucks per month. Last month, two of the employees were absent several days each, and only 400 trucks were repaired. What are the utilization and efficiency of the repair shop? Design Capacity = 800 trucks Effective Capacity = 600 trucks Actual Output = 400 trucks acutal output 400Utilization = == 50 .0% design capacity 800 Efficiency = actual output = 400 = 66.7% effective capacity 600 (Capacity, moderate) {AACSB: Analytic Skills} The local convenience store makes personal pan pizzas. Currently, their oven can produce 50 pizzas per hour. It has a fixed cost of $2,000, and a variable cost of $0.25 per pizza. The owner is considering a bigger oven that can make 75 pizzas per hour. It has a fixed cost of $3,000, but a variable cost of $0.20 per pizza. 1. a. At what quantity do the two ovens have equal costs? 2. b. If the owner expects to sell 9,000 pizzas, should he get the new oven? (a) The crossover is where $2,000 + .25X = $3,000 + .20X. Simplifying, 0.05X = 1000, or X = 20,000 units (b) no, stay with the current oven. (Break-even analysis, moderate) {AACSB: Analytic Skills} A product is currently made in a process-focused shop, where fixed costs are $9,000 per year and variable cost is $50 per unit. The firm sells the product for $200 per unit. What is the break-even point for this operation? What is the profit (or loss) on a demand of 200 units per year? BEP = 60 units; TR = $40,000, TC = $19,000, therefore Profit = $21,000. (Break-even analysis, moderate) {AACSB: Analytic Skills} A product is currently made in a process-focused shop, where fixed costs are $8,000 per year and variable cost is $40 per unit. The firm currently sells 200 units of the product at $200 per unit. A manager is considering a repetitive focus to lower costs (and lower prices, thus raising demand). The costs of this proposed shop are fixed costs = $24,000 per year and variable costs = $10 per unit. If a price of $80 will allow 400 units to be sold, what profit (or loss) can this proposed new process expect? Do you anticipate that the manager will want to change the process? Explain. Old: TR = $40,000, TC = $16,000, therefore Profit = $24,000. New: TR = $80 x 400 = $32,000, TC = $24,000 + $10 x 400 = $28,000, for a profit of $4,000. Most will say NO; the larger repetitive process is less profitable than the smaller processfocused shop. (Break-even analysis, moderate) {AACSB: Analytic Skills} 72. A firm sells two products. Product R sells for $20; its variable cost is $6. Product S sells for $50; its variable cost is $30. Product R accounts for 60 percent of the firm's sales, while S accounts for 40 percent. The firm's fixed costs are $4 million annually. Calculate the firm's break-even point. The contribution for product R is 70 percent of selling price, or 0.70; the contribution for product S is 0.40. The weighted contribution for R is .70 x .60 = .42; the weighted contribution for S is .40 x .40 = .16. The sum of the weighted contributions is 0.58. The break-even point is $4,000,000 / 0.58 = $6,896,552. (Break-even analysis, moderate) {AACSB: Analytic Skills} A firm is weighing three capacity alternatives: small, medium, and large job shop. Whatever capacity choice is made, the market for the firm's product can be "moderate" or "strong." The probability of moderate acceptance is estimated to be 40 percent; strong acceptance has a probability of 60 percent. The payoffs are as follows. Small job shop, moderate market = $24,000; Small job shop, strong market = $54,000. Medium job shop, moderate market = $20,000; medium job shop, strong market = $64,000. Large job shop, moderate market = $2,000; large job shop, strong market = $96,000. Which capacity choice should the firm make? The expected values for the three decision alternatives (capacities) are: small job shop = $42,000; medium job shop = $46,400; and large job shop = $56,800. The firm 73. 74. should choose the large job shop. (Applying decision trees to capacity decisions, moderate) {AACSB: Analytic Skills} A firm produces three products in a repetitive process facility. Product A sells for $60; its variable costs are $20. Product B sells for $200; its variable costs are $80. Product C sells for $25; its variable costs are $15. The firm has annual fixed costs of $320,000. Last year, the firm sold 1000 units of A, 2000 units of B, and 10,000 units of C. Calculate the break-even point of the firm. The firm has some idle capacity at these volumes, and chooses to cut the selling price of A from $60 to $45, believing that its sales volume will rise from 1000 units to 2500 units. What is the revised break-even point? Calculations for the original version of this problem are: Selling price P $60 $200 $25 Variable cost V $20 $80 $15 V/P .333 .400 .600 1-V/P .667 .600 .400 Sales $60,000 $400,000 $250,000 $710,000 Percent of sales .0845 .5634 .3521 1.0000 Weighted contrib .0564 .3380 .1408 0.5352 Product A B C The original break-even for this firm was $320,000 / .5352 = $597,907. This is a calculator-based result; Excel reports $597,895. When the price of A is reduced, the revised calculations are: Product A B C Selling price P $45 $200 $25 Variable cost V $20 $80 $15 V/P .444 .400 .600 1-V/P .556 .600 .400 Sales $112,500 $400,000 $250,000 $762,500 Percent of sales .1475 .5246 .3279 1.0000 Weighted contrib .0820 .3148 .1312 0.5280 The firm's breakeven point has increased to $320,000 / .5280 = $606,061. (Calculator-based; Excel reports $606,211). (Break-even analysis, difficult) {AACSB: Analytic Skills} 75. Health Care Systems of the South is about to buy an expensive piece of diagnostic equipment. The company estimates that it will generate uniform revenues of $500,000 for each of the next eight years. What is the present value of this stream of earnings, at an interest rate of 6%? What is the present value if the machine lasts only six years, not eight? If the equipment cost $2,750,000, should the company purchase it? S = R * X = 500,000 * 6.210 = $3,105,000; S = R * X = 500,000 * 4.917 = $2,458,500 The company should purchase the equipment if it believes it will last eight years, but not if it fears that it will last only six. (Applying investment analysis to strategy-driven investments, moderate) {AACSB: Analytic Skills} 76. A firm produces three products. Product A sells for $60; its variable costs are $20. Product B sells for $200; its variable costs are $120. Product C sells for $25; its variable costs are $10. Last year, the firm sold 1000 units of A, 2000 units of B, and 10,000 units of C. The firm has fixed costs of $320,000 per year. Calculate the breakeven point of the firm. Calculations for this problem are: Selling price P $60 $200 $25 Variable cost V $20 $120 $10 V/P .333 .600 .400 1-V/P .667 .400 .600 Sales $60,000 $400,000 $250,000 $710,000 Percent of sales .0845 .5634 .3521 1.0000 Weighted contrib .0564 .2254 .2113 .4931 Product A B C Break-even for this firm is $320,000 / .4931 = $648,956. Note: this result reflects calculator rounding, as students might experience at exam time. Excel reports $649, 143. (Break-even analysis, moderate) {AACSB: Analytic Skills} 77. A firm is about to undertake the manufacture of a product, and is weighing three capacity alternatives: small job shop, large job shop, and repetitive manufacturing. The small job shop has fixed costs of $3,000 per month, and variable costs of $10 per unit. The larger job shop has fixed costs of $12,000 per month and variable costs of $3 per unit. The repetitive manufacturing plant has fixed costs of $30,000 and variable costs of $1 per unit. Demand for the product is expected to be 1,000 units per month with "moderate" market acceptance, but 2,000 under "strong" market acceptance. The probability of moderate acceptance is estimated to be 60 percent; strong acceptance has a probability of 40 percent. The product will sell for $25 per unit regardless of the capacity decision. Which capacity choice should the firm make? The payoffs are as follows: small job shop, moderate acceptance = $12,000; small job shop, strong acceptance = $27,000; large job shop, moderate acceptance = $10,000; large job shop, strong acceptance = $32,000; repetitive manufacturing, moderate acceptance = -$6,000; and repetitive manufacturing, strong acceptance = $18,000. The expected value for the small job shop decision alternative is $18,000. The expected value of the large job shop alternative is $18,800. The expected value for the repetitive manufacturing alternative is $3600. The firm should choose the large job shop capacity alternative. (Applying decision trees to capacity decisions, difficult) {AACSB: Analytic Skills} 78. A new machine tool is expected to generate receipts as follows: $5,000 in year one; $3,000 in year two, nothing in the next year, and $2,000 in the fourth year. At an interest rate of 6%, what is the present value of these receipts? Is this a better present value than 79. $2,500 each year over four years? Explain. 5,000 x .943 + 3,000 x .890 + 2,000 x .792 = $8,969 using Table S7.1 ($8,971.16 using Excel). The steady stream generates NPV of 2,500 x 3.465 = $8,662.5 ($8,662.76 using Excel). The irregular stream has the higher present value because the large receipts are early. (Applying investment analysis to strategy-driven investments, moderate) {AACSB: Analytic Skills} Advantage Milling Devices is preparing to buy a new machine for precision milling of special metal alloys. This device can earn $300 per hour, and can run 3,000 hours per year. The machine is expected to be this productive for four years. If the interest rate is 6%, what is the present value? What is the present value if the interest rate is not 6%, but 0%? Why does present value fall when interest rates rise? S = R * X = 300 * 3,000 * 3.465 = $3,118,500; S = R * X = 300 * 3,000 * 3.240 = $2,916,000 NPV falls because higher interest rates create a greater discount on future receipts. (Applying investment analysis to strategy-driven investments, moderate) {AACSB: Analytic Skills} Suppose that the market has a 70% chance of being favorable and a 30% chance of being unfavorable. A favorable market will yield a profit of $300,000, while an unfavorable market will yield a profit of $20,000. What is the expected monetary value (EMV) in this situation? EMV = (0.7)($300,000) + (0.3)($20,000) = $210,000 + $6,000 = $216,000. (Applying decision trees to capacity decisions, easy) {AACSB: Analytic Skills} 80. MGT 301: Operations Management Name: Alban Mariau Fall 2008 2/40 + 10 105% Instructor: Kurt Haskell Quiz: Chapter 7 Due: Thursday: Oct 30, 10 PM Dell's approach to personal computer manufacturing is to use a product focus, which gives the company its low-cost competitive advantage. True False A firm's process strategy is its approach to transforming resources into goods and services. True False In process-focused facilities, equipment utilization is low. True False Harley-Davidson, because it has so many possible combinations of products, utilizes the process strategy of mass customization. True False A value-stream map includes both (1) inventory quantities, and (2) symbols for customers and suppliers. True False The assembly line is a classic example of a repetitive process. True False The tool that calculates which process has the lowest cost at any specified production volume is a crossover chart. True False The term focused processes refers to the quest for increased efficiency, whether in goods or services, that results from specialization. True False Service blueprinting is a process analysis technique that focuses on the customer and the provider's interaction with the customer. True False Activity times should not be included in a service blueprint. True False Time-function mapping is a flow diagram with time added to the horizontal axis. True False Process maps use distance, but not time, to show the movement of material, product, or people through a process. True False Professional services typically require low levels of labor intensity. True False Process control is the use of information technology to monitor and control a physical process. True False Successful process redesign focuses on departmental areas where small, continuous improvements can be made. True False 16. A job shop is an example of a(n) a. repetitive process b. continuous process c. line process d. intermittent process e. specialized process 17. Three types of processes are a. goods, services, and hybrids b. manual, automated, and service c. process focus, repetitive focus, and product focus d. modular, continuous, and technological e. input, transformation, and output 18. Which of the following industries is likely to have low equipment utilization? a. auto manufacturing b. commercial baking c. television manufacturing d. chemical processing e. restaurants 19. A product-focused process is commonly used to produce a. high-volume, high-variety products b. low-volume, high-variety products c. high-volume, low-variety products d. low-variety products at either high-or low-volume e. high-volume products of either high-or low-variety 20. Which of the following transformations generally has the highest equipment utilization? a. process-focused process b. repetitive process c. product-focused process d. specialized process e. modular process 21. Harley Davidson a. utilizes job shops to make each of its modules b. uses product focused manufacturing c. uses a large number of modules to build a small number of different bikes d. uses work cells to feed its assembly line e. All of the above are true. 22. Which of the following is false regarding repetitive processes? a. They use modules. b. They allow easy switching from one product to the other. c. They are the classic assembly lines. d. They have more structure and less flexibility than a job shop layout. e. They include the assembly of basically all automobiles. 23. When done correctly, mass customization a. increases pressure on supply chain performance b. helps eliminate the guesswork that comes with sales forecasting c. drives down inventories d. increases pressure on scheduling e. all of the above 24. Which of the following phrases best describes process focus? a. low volume, high variety b. finished goods are usually made to a forecast and stored c. operators are modestly skilled d. high fixed costs, low variable costs e. raw material inventories are high relative to the value of the product 25. Process A has fixed costs of $1000 and variable costs of $5 per unit. Process B has fixed costs of $500 and variable costs of $15 per unit. The crossover point between process A and process B is a. 50 units b. 200 units c. $2,500 d. $5,000 e. $9,500 26. The crossover point is that production quantity where a. variable costs of one process equal the variable costs of another process b. fixed costs of a process are equal to its variable costs c. total costs equal total revenues for a process d. total costs for one process equal total costs for another process e. the process no longer loses money 27. Value Stream Mapping a. is a variation on time function mapping b. examines the supply chain to determine where value is added c. extends time function mapping back to the supplier d. starts with the customer and works backwards e. All of the above are true. 28. Service blueprinting a. provides the basis to negotiate prices with suppliers b. mimics the way people communicate c. determines the best time for each step in the process d. focuses on the provider's interaction with the customer e. can only be successful with two-dimensional processes 29. Which of the following is true regarding opportunities to improve service processes? a. Automation can do little to improve service processes, because services are sopersonal. b. Layout is of little consequence, since services seldom use an assembly line. c. If a work force is strongly committed, it need not be cross-trained and flexible. d. All of the above are true. e. None of the above is true. 30. The use of information technology to monitor and control a physical process is known as a. process control b. computer-aided design c. information numeric control d. numeric control e. none of the above 31. Computer-integrated manufacturing (CIM) includes manufacturing systems that have a. computer-aided design, a flexible manufacturing system, inventory control,warehousing and shipping integrated b. transaction processing, management information systems, and decision supportsystems integrated c. automated guided vehicles, robots, and process control d. robots, automated guided vehicles, and transfer equipment e. all of the above 32. Which of the following is not one of the essential ingredients for mass customization? a. high machine utilizations b. personnel and facility flexibility c. reliance on modular design d. rapid throughput e. very effective scheduling 33. Advances in technology a. have impacted the manufacturing sector only b. have had only limited impact on services c. have failed to change the level of customer interaction with an organization d. have had dramatic impact on customer interaction with services and with products e. have dramatically changed health care, but have not changed retailing 34. Ethical and environmentally friendly processes include which of the following? a. emission controls b. recycling c. efficient use of resources d. reduction of waste by-products e. all of the above 35. Which of the following statements regarding ethical and environmentally friendly processes is true? a. Operations managers can be environmentally sensitive, but they must avoid following a low cost strategy. b. Processes can be environmentally friendly or socially responsible, but not both. c. Operations managers can be environmentally sensitive and still follow a low cost strategy. d. Using energy-efficient lighting saves so little that it should not be labeledenvironmentally friendly. e. The only business strategy consistent with ethical and environmentally sensitive management is the differentiation strategy. 36. An organization's approach to transforming resources into goods and services is called its a process strategy. 37. A special form of time-function mapping, which goes beyond the organization into its supply chain, is value-stream mapping. 38. Mass customization is a rapid, low-cost production process that caters to constantly changing unique customer desires. 39. Service blueprinting is a process analysis technique that focuses on the customer and the producer's interaction with the customer. 40. The strategy for improving service productivity that customizes at delivery, rather than at production, is process design. Extra Credit: 10 points 1. A firm is about to undertake the manufacture of a product, and is weighing the process configuration options. There are two intermittent processes under consideration, as well as a repetitive focus. The smaller intermittent process has fixed costs of $3,000 per month, and variable costs of $10 per unit. The larger intermittent process has fixed costs of $12,000 and variable costs of $2 per unit. A repetitive focus plant has fixed costs of $50,000 and variable costs of $1 per unit. a. At what output does the large intermittent process become cheaper than the small one? 3000+10x=12000+2x 8x=9000 x=9000/8=1125 At 1125 outputs the large intermittent process becomes cheaper than the small one. At 1125 outputs, we reached the crossover point. b. At what output does the repetitive process become cheaper than the larger intermittent process? 12000+2x=50000+x x=38000 At 38000 outputs the large intermittent process becomes cheaper than the small one. At 38000 outputs, we reached the crossover point. ... View Full Document

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