Transcript Slide 1
BUAD 306
Chapter 5 - Capacity Planning Chapter 8 – Location Planning (Cost Volume ONLY)
Daily Capacity
“There’s only so many hours in a day…” “I can’t take it anymore” “If I eat one more piece, I am going to explode”
Capacity Planning
The upper limit or ceiling on the load that an operating unit can handle.
Establishes the overall level of productive resources for a firm.
Enables managers to quantify production capabilities for a firm and make plans accordingly.
What to Ask?
The basic questions in capacity handling are: What kind of capacity is needed? (resources/facility) How much is needed? (add to existing or build new?) When is it needed?
WHO / WHAT / WHERE / WHEN / WHY
Importance of Capacity Decisions
Should meet future demand Affects operating costs Determines initial cost Involves long-term commitment (requires lots of $$$) Affects competitiveness
Definitions
Design Capacity Maximum obtainable output Effective Capacity Maximum capacity given product mix, scheduling difficulties, and other doses of reality.
Actual output Rate of output actually achieved- cannot exceed effective capacity.
Determinants of Effective Capacity
Facilities Location / layout Products or services Standard vs. customized Processes Design and execution Human considerations Operations External forces Design: Planned Effective: Reality Actual: Realized
Developing Capacity Alternatives
Design flexibility into systems Take a “big picture” approach to capacity changes Prepare to deal with capacity “chunks” Attempt to smooth out capacity requirements Identify the optimal operating level
Service Capacity Considerations
Need to be near the customer Can’t inventory services Volatility in demand
Cost-Volume Analysis
Relationships between cost, revenue, and volume of output.
Variable costs vary directly with volume of output.
Break-even point - the volume of output at which total cost and total revenue are equal.
Assumptions of Cost-Volume Analysis
One product is involved Everything produced can be sold The variable cost per unit is the same regardless of the volume Fixed costs do not change with volume changes The revenue per unit is the same regardless of volume
Cost-Volume Relationships Figure 5-8a
0 Fixed cost (FC) Q (volume in units)
Cost-Volume Relationships Figure 5-8b
0 Q (volume in units)
Cost-Volume Relationships Figure 5-8c
0 BEP units Q (volume in units)
Breakeven Point Q
BEP
= FC R - VC
BEP Calculations – SEE TEXT
To calculate Total Profit: P = Q(R - VC) - FC where Q = Quantity R = Revenue/unit VC = Variable cost/unit FC = Fixed Cost To calculate the required volume, Q, needed to generate a specified profit, P : Q = P + FC R – VC To calculate a break-even point: Q BEP = FC R - VC
Example A
Process
A B C
Fixed
250,000 350,000 100,000
Variable
15 10 30 1. What is the breakeven point for each if revenue = 50?
2. Which would you choose?
Example A – Part 2
Process
A B C
Fixed
250,000 350,000 100,000
Variable Capacity
15 12,000 10 10,000 30 4,000 1. Are you still comfortable with your selections from before given the capacities above?
2. What if demand was expected to be 20,000 for ever?
FACTORY EXAMPLE
Location
South North West
Fixed
30,000 50,000 10,000
Variable Capacity
5 15,000 2 9,000 6 4,000 1. BEP given revenue = 10, which do you choose?
2. Are you still comfortable with your selections from before given the capacities above?
3. If demand is to range from 7,000 –9,000?
4. If demand was expected to be 14,000-20,000?
5. If demand was to be around 5,000 steadily?
Total Cost Analysis
Comparisons between 2 or more alternatives: TC = FC + Q (VC)
Example B
Process
A B
Fixed
250,000 350,000
Variable
15 10 1. Which process to use at low volumes?
2. Which process to use at very high volumes?
3. Point of indifference between the two processes?
Example B – Part 2
Process
A B C
Fixed
250,000 350,000 100,000
Variable
15 10 30
Example B – Part 3
Process
A B C
Fixed
250,000 350,000 100,000
Variable Capacity
15 25,000 10 50,000 30 8,000
Example C
Machine
X Y Z
Fixed
100,000 300,000 500,000
Variable Capacity
10 50,000 5 60,000 2 80,000
FACTORY EXAMPLE
Location
South North West
Fixed
30,000 50,000 10,000
Variable Capacity
5 15,000 2 9,000 6 4,000 1. BEP given revenue = 10, which do you choose?
2. Are you still comfortable with your selections from before given the capacities above?
3. If demand is to range from 7,000 –9,000?
4. If demand was expected to be 14,000-20,000?
5. If demand was to be around 5,000 steadily?
Why Never S???
S=W @ 20,000 S N W S=N @ 6666.67
N=W @ 10,000
HW #7
A firms plans to begin production of a new small appliance. The manager must decide whether to p urchase the motors for the item from a vendor for $7 each or produce in house. If produced in house, it would use one of 2 processes: One has an annual FC = $160,000 and VC = $5/unit. The other has an annual FC = $190,000 and a VC = $4/unit. Determine the range of annual volume for which each alternative would be best.