4 Capacity decisions often involve long term commitment of resources and the

# 4 capacity decisions often involve long term

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4. Capacity decisions often involve long-term commitment of resources and the fact that, once they are implemented, it may be difficult or impossible to modify those decisions without incurring major costs. 5. Capacity decisions can affect competitiveness. If a firm has excess capacity, or can quickly add capacity, that fact may serve as a barrier to entry by other firms. Then too, capacity can affect delivery speed, which can be a competitive advantage. 6. Capacity affects the ease of management; having appropriate capacity makes management easier than when capacity is mismatched. ILLUSTRATION 1: Given the information below, compute the efficiency and the utilization of the vehicle repair Department: Design capacity = 50 trucks per day Effective capacity = 40 trucks per day Actual output = 36 trucks per day SOLUTION Efficiency = Actual output Effective capacity = 36trucks per day 40trucks per day = 90% Utilisation = Actual output Design capacity = 36trucks per day 50trucks per day = 72% ILLUSTRATION 2: The design capacity for engine repair in our company is 80 trucks per day. The effective capacity is 40 engines per day and the actual output is 36 engines per day. Calculate the utilization and efficiency of the operation. If the efficiency for next month is expected to be 82%, what is the expected output? 58 Operations Management SOLUTION Utilization = Actual output Design capacity = 36 40 = 45% Efficiency = Actual output Effective capacity = 36 40 = 90% Expected output = (Effective capacity)(Efficiency) = (40)(0.82) = 32.8 engines per day ILLUSTRATION 3: Given: F = Fixed Cost = Rs. 1000, V = Variable cost = Rs. 2 per unit and P = Selling price = Rs. 4 per unit, Find the break-even point in Rs. and in units. Develop the break-even chart. SOLUTION Break-even point(\$) = 1000 1000 BEP(\$) \$2,000 2 0.5 11 4 F V P   Break-even point( ) x = 1000 BEP( ) 500 42 F x PV   Fig. 3.2 ILLUSTRATION 4: Jack’s Grocery is manufacturing a “store brand” item that has a variable cost of Rs. 0.75 per unit and a selling price of Rs. 1.25 per unit. Fixed costs are Rs. 12,000. Current volume is 50,000 units. The Grocery can substantially improve the product quality by adding a new piece of equipment at an additional fixed cost of Rs. 5,000. Variable cost would increase to Rs. 1.00, but their volume should increase to 70,000 units due to the higher quality product. Should the company buy the new equipment? What are the break-even points (Rs. and units) for the two processes? Develop a break-even chart. Systems Design and Capacity 59 SOLUTION Profit = TR – TC Option A: Current Equipment BEP Sales in value (Rs.) BEP Sales in Quantity (Units) Option B: Adding New Equipment BEP Sales in value (Rs.) BEP Sales in Quantity (Units) Profit = 50000 * (1.25 – 0.75) –12000 = Rs.13000. Option B: Add equipment: Profit = 70000 * (1.25 – 1.00) – 17000 = Rs.500. Therefore, the company should continue as is with the present equipment as this returns a higher profit.  #### You've reached the end of your free preview.

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