Chapter 9: Capacity Planning and Location Decision

Multiple Choice
1. Capacity planning can occur at all but which level:
a) organization
b) division
c) assembly line
d) machine level
e) board of directors level
Ans: E
2. One reason capacity and location decisions are usually made simultaneously is what?
a) in order to get them in the operating budget on a consistent basis
b) it makes it easier to understand capacity
c) often there is not enough time available to separate them
d) they require the same types of information
e) the size of a new facility may affect its location
Ans: E
3. The maximum output that can be achieved by a facility is ___________________________.
a) lead time
b) storage space
c) capacity
d) productivity
e) cycle counting
Ans: C
4. Capacity decisions at the strategic level include ______________________________.
a) investment in new facilities and equipment
b) size of workforce
c) inventory buffers
d) day-to-day use of machines
e) composition of the workforce
Ans: A
5. If capacity is excessive, a company may have to ____________________________________.
a) decide how to use a partially empty facility
b) outsource
c) back-order
d) use group technology
e) raise prices
Ans: A
6. Capacity planning is complicated by the fact that _________________________________.
a) capital markets are complex
b) existing facilities may become obsolete
c) capacity is difficult to define
d) capacity is usually purchased in chunks, rather than smooth increments
e) depreciation must be calculated
Ans: D
7. Investments in building or purchasing long-term production facilities are inherently risky due to __________.
a) uncertainty in forecasting future demands
b) unexpected changes in interest rates
c) durability of materials
d) corporate mergers
e) rapid technology changes

Ans: A
8. Capacity planning is difficult because
a) Board of directors set the requirements
b) the mathematical requirements are difficult
c) the planning stages always require global considerations
d) there is no one way to measure it
e) it is easy to confuse the service organization and manufacturing organization measurements
Ans: D
9. An example of an input measure of capacity is _____________________.
a) labor hours
b) number of patients per month
c) number of pizzas per day
d) revenues per day
e) number of cars per shift
Ans: A
10. Which of the following is NOT a measure of output capacity?
a) cars per shift
b) labor hours consumed
c) revenues per day
d) TVs sold per day
e) patients served per month
Ans: B
11. Which of the following is not a factor in capacity planning?
a) approach used to measure capacity
b) economies of scale
c) prepare to deal with capacity in "chunks"
d) proximity to suppliers
e) identify the best operating level
Ans: D
12. Input measures of capacity work better when a company produces _____________________________.
a) discrete items
b) a single product
c) liquids
d) many different products
e) off-the-shelf items
Ans: D
13. When discussing the capacity of a facility, we need what two types of information?
a) the amount of available capacity and the productivity of workers
b) the speed of the machines and the availability of labor
c) the amount of available capacity and the effectiveness of capacity use
d) the investment in equipment and the availability of labor
e) the investment in equipment and the number of workers
Ans: C
14. Effective capacity is
a) the maximum input rate that can be sustained under normal conditions
b) the maximum output rate that can be sustained under normal conditions
c) the maximum input rate that can be sustained under ideal conditions
d) the maximum output rate that can be sustained under ideal conditions
e) the maximum percent measure of how well available capacity is being used

Ans: B
15. Which of the following does not contribute to the sustainability of design capacity?
a) scheduled machine maintenance
b) overtime
c) overstaffing
d) using equipment to the maximum
e) subcontracting
Ans: A
16. The maximum output rate that can be achieved by a facility under ideal conditions is _________________.
a) utilization
b) design capacity
c) effective capacity
d) ultimate capacity
e) temporary capacity
Ans: B
17. The maximum output rate that can be sustained under normal conditions is _______________________.
a) utilization
b) design capacity
c) effective capacity
d) ultimate capacity
e) temporary capacity
Ans: C
18. The ratio of actual output rate to capacity is ____________________________.
a) effectiveness
b) cycle time
c) throughput
d) utilization
e) productivity
Ans: D
19.
a) Design
b) Flexible
c) Extra
d) Effective
e) Focused

capacity can serve to intimidate and preempt competitors from entering the market.

Ans: C
20. The best operating level is the volume of output that results in the _________________________.
a) lowest average unit cost
b) most revenue
c) maximum use of machinery
d) best quality
e) optimum product mix
Ans: A
21. Operating a facility close to its best operating level is clearly important because
a) it reduces fixed cost
b) it reduces overtime requirements
c) of impact on costs
d) of impact on employees bonuses
e) it increases production
Ans: C

22. The cost per unit is $36.74 at the best operating level. When the output is higher, the unit cost will be what?
a) lower
b) the same
c) higher
d) could be higher or lower
e) could be higher, lower or the same
Ans: C
23. Economies of scale occur when a company is operating _________________________________________.
a) at its best operating level and increases its output
b) at its best operating level and decreases its output
c) below its best operating level and decreases its output
d) above its best operating level and increases its output
e) below its best operating level and increases its output
Ans: E
24. The concept of diseconomies of scale _____________________________________________________.
a) states that the average cost of a unit produced is reduced when the amount of output increases
b) is not realistic
c) is not valid for regulated industries
d) states that beyond a certain point the cost of each additional unit made increases
e) is an approach for measuring unusable output
Ans: D
25. Management has decided to add capacity incrementally in smaller chunks as needed, rather than purchasing
one large facility. This decision ___________________________________.
a) is very risky
b) will result in low initial costs
c) will ultimately result in lower costs per unit if demand increases rapidly
d) positions the company to be well prepared for high demand in the future
e) can lead to a large amount of excess capacity
Ans: B
26. Last month TMJG Co. started producing a new product called thingamajigs from its new plant. Sales were quite
good for the first couple of weeks. Unfortunately, a technological innovation was then announced by a competitor.
This innovation will almost completely eliminate the demand for thingamajigs. As a result, TMJG has decided to
shut down and dismantle the plant next week. The average cost per unit will be highest if the plant was
_______________________________________.
a) a small facility
b) in the right location
c) a large facility
d) just-in-time
e) a medium facility
Ans: C
27. A focused factory is one that __________________________________________________.
a) produces many products with options
b) is small and highly specialized
c) has a large number of management specialists
d) is vertically integrated
e) is located at the center of demand
Ans: B
28. Compared to large facilities, focused factories _________________________________________.
a) bring economies of scale
b) have much bureaucracy
c) are ancient history

d) lead to higher average inventories

e) are more flexible
Ans: E
29.
facilities may not be the best approach in todays business environment that has short product
and technological life cycles and in which flexibility is more important than ever before.
a) Large
b) Small
c) Leased
d) Self-operating
e) Agile
Ans: A
30. Large facilities can benefit from the concept of
a) just-in-time
b) focused factories
c) economies of scale
d) supply chain
e) hierarchical management

by creating a plant within a plant (PWP).

Ans: B
31. One benefit PWP provides over independent plants is
a) increased production output
b) increased design capacity capabilities
c) reduction of unnecessary layers of bureaucracy
d) reduction in transportation costs
e) improved supplier relationships
Ans: C
32. In the 1980s retail sales were dominated by large department stores. However, in the 1990s gains in sales were
made by specialty stores because ______________________________________________________.
a) the large department stores started moving out of shopping malls, and their new locations were not nearly as
effective
b) customers got tired of trying to find sales clerks who would help them in the large department stores
c) the specialty stores always had donuts and coffee for their customers
d) consumer preferences change very rapidly, and the specialty stores can focus on a specific set of
customers and respond to their unique needs
e) parking is more readily available at the specialty stores
Ans: D
33. According to the text, one of the fastest-growing trends today is
a) Leveraging technology
b) PWP
c) focused plants
d) developing a large network of subcontractors
e) developing a large focused distribution chain
Ans: D
34.
can perform a number of tasks to help a company focus on its core capabilities.
a) A plant within a plant
b) Agile manufacturing
c) Total quality management
d) Just-in-time
e) Subcontractor networks
Ans: E
35. The first step in making a capacity planning decision is _____________________________________.

a) evaluate capacity alternatives

b) implementation
c) identify capacity requirements
d) develop capacity alternatives
e) weight capacity objectives
Ans: C
36. Long-term capacity requirements are identified on the basis of ________________________________.
a) the current trend of the economy
b) the expected lifetime of the facility
c) demographic factors
d) forecasts of future demand
e) future political events
Ans: D
37. Capacity cushions can be helpful if _____________________________________________.
a) demand is greater than expected
b) sales need to be buffered from production
c) total quality management fails
d) productivity is too high
e) there is excess capacity
Ans: A
38. Evaluate capacity alternatives can include use of _________________________________________.
a) the Delphi method
b) estimated market shares
c) demographic factors
d) econometric forecasting
e) decision trees
Ans: E
39. Which of the following information items is not contained in decision trees?
a) points in time when decisions are made
b) probability of choosing decision alternatives
c) chance event probabilities
d) decision alternatives
e) outcomes, such as estimated profits
Ans: B
40. Decision trees are useful when the alternatives are _____ and involve _____
a) local, senior management
b) in parallel, certainty
c) in sequence, uncertainty
d) in sequence, certainty
e) in parallel, certainty
Ans: C
41. Solving a decision tree that involves maximizing profit includes _______________________________.
a) using probabilities to calculate expected values for decision points
b) calculating from left to right
c) selecting the decision alternative with the highest expected value
d) calculating expected values for all chance events before considering decision nodes
e) inverting decision nodes
Ans: C
42. Expected values are
a) forecasted sales prices

b) forecasted revenues
c) average value of chance events
d) weighted value of the chance events
e) exponential value of the chance events
Ans: D
43. Which of the following has the least to do with location analysis?
a) sources of transportation
b) reduction in trade barriers
c) information technology reducing need for proximity
d) retail stores locating near each other
e) automation of factories
Ans: E
44. Service organizations such as restaurants, movie theaters, and banks focus on locating near ____________.
a) suppliers
b) roads
c) intersections
d) their customers
e) potential workers
Ans: D
45. Location decisions are particularly important because _______________________________________.
a) typically they are made rather frequently
b) they entail a high cost, short-term commitment
c) there are so many potential locations
d) they have a major impact on product design
e) they can have a large impact on operating costs and revenues
Ans: E
46. Which of the following is least likely to be a consideration in facility location?
a) the design of the production process
b) mistakes in choosing a location can be difficult to correct
c) often there are a number of acceptable locations
d) expanding capacity at a current location may be an option
e) location decisions can have a major impact on operating costs and revenues
Ans: A
47. A facility location factor that is important for both service and manufacturing organizations is locating close to
_________________________________.
a) labor supply
b) sources of transportation
c) suppliers
d) warehouses
e) natural resources
Ans: A
48. Locating close to customers is least important for __________________________.
a) bakeries
b) movie theaters
c) flower shops
d) diamond mines
e) gas stations
Ans: D
49. It takes many pounds of milk to make one pound of cheese. Therefore, there are many cheese factories in dairy
states because _________________________________.

a) of reputation
b) cheeseheads eat a lot of cheese
c) of transportation costs
d) making cheese is a batch process
e) customers prefer domestic cheese
Ans: C
50. Local wage rates, presence of local unions, and attitudes of local workers would be major factors for location
decision for businesses that ______________________________________.
a) are labor intensive
b) have perishable products
c) have high transportation costs
d) have need for specific raw materials
e) provide in-home services
Ans: A
51. In facility location zoning restrictions, soil conditions, and access roads for trucks are ________________.
a) community considerations
b) site considerations
c) quality of life issues
d) hardly ever important
e) cultural considerations
Ans: B
52. Which of the following is not a quality-of-life factor?
a) climate
b) a desirable lifestyle
c) good schools
d) a low crime rate
e) room for customer parking
Ans: E
53. With respect to globalization, which of the following would not be considered an important location
consideration?
a) vertical integration
b) trade barriers
c) culture
d) language barriers
e) foreign markets
Ans: A
54. Disadvantages of globalization include __________________________________________________.
a) use of cheap labor in certain countries
b) increased stigma due to locating factories overseas
c) reduction of trade barriers
d) increased sales in foreign markets
e) political risks for countries with unstable governments
Ans: E
55. Issues that need to be considered in location globally include all of the following except ______________.
a) different cultures
b) FEC accounting requirements
c) language barriers
d) different laws
e) different business practices
Ans: B

56. The least likely reason for a U.S. firm to choose to locate a factory in a foreign country is _____________.
a) climate
b) natural resources
c) markets
d) cheaper suppliers
e) lower labor costs
Ans: A
57. The first step managers need to take when making facility location decisions is _____________________.
a) begin negotiations with governments for several potential locations
b) identify specific location possibilities
c) gather information on location alternatives
d) evaluate specific sites
e) identify the location factors that are dominant for the business
Ans: E
58. When evaluating location alternatives the firm should look at
a) only qualitative factors
b) only quantitative factors
c) both qualitative and quantitative factors
d) weighted average values
e) decision support models only
Ans: C
59. An excellent procedure that can be used with location factors that are qualitative is __________________.
a) the transportation method
b) break-even analysis
c) the factor rating method
d) the center of gravity approach
e) the load-distance method
Ans: C
60. The first step in the factor rating method for evaluating location alternatives is what?
a) select a scale by which to evaluate each alternative relative to each factor
b) evaluate each alternative relative to each factor
c) select the alternative with the highest score
d) identify dominant factors
e) assign weights to factors reflecting the importance of each factor relative to the other factors
Ans: D
61. A location analysis has been narrowed down to two locations, A and B. The main factors in the decision will be
supply of raw materials, which has a weight of 50, and labor cost, which has a weight of 50. The ratings for raw
materials and labor are: for A, 3 and 4, respectively; for B, 5 and 3, respectively. Using the factor rating method, the
manager should _________________________________________.
a) be indifferent between these locations
b) choose location A
c) choose location B
d) reject both locations
e) determine the capacity before deciding
Ans: C
62. The load-distance model frequently utilizes
two points using only north-south and east-west movements.
a) curvilinear
b) Euclidean
c) rectilinear
d) direct
e) vertical

distance, which is the shortest distance between

Ans: C
63. Which of the following is not a step in the load-distance model?
a) solve algebraically for the best location
b) identify loads
c) select the site with the lowest load-distance score
d) identify distances
e) calculate the load-distance score for each location
Ans: A
64. In choosing a location, the
good starting point.
a) transportation method
b) break-even approach
c) factor rating method
d) center of gravity approach
e) load-distance method

provides an easy way to calculate X and Y coordinates for a

Ans: D
65. The center of gravity approach
a) identifies the precise location for the new distribution site
b) identifies where the trucking firm should be located
c) may identify a location that may not be feasible to locate at
d) relies on GPS coordinates for all calculations
e) relies on which transportation method is selected
Ans: C
66. Which of the following is not a valid assumption of the break-even model?
a) only one product is involved
b) everything which is produced will be sold
c) the revenue per unit will be the same regardless of volume
d) the fixed cost per unit will be the same regardless of volume
e) the variable cost per unit will be the same regardless of volume
Ans: D
67. For fixed costs of $10,000, revenue per unit of $20, and variable cost per unit of $10, the break-even quantity is
______________________.
a) 10
b) 500
c) 1,000
d) 2,000
e) 10,000
Ans: C
68. At the break-even point, _______________________________________.
a) output equals capacity
b) total cost equals total revenue
c) total cost equals profit
d) variable cost equals fixed cost
e) variable cost equals total revenue
Ans: B
69. For a break-even graph, the total cost for each possible location is plotted against __________________.
a) fixed costs
b) variable costs
c) profit margin
d) quantity

e) price
Ans: D
70. To plot the break-even line one end of the line is the y-intercept point. The other line point
a) requires the center of gravity calculation
b) is established by the finance department
c) is arbitrary but usually the expected volume
d) is not arbitrary
e) is derived from the location analysis
Ans: C
71. The method which relies on a specific algorithm to evaluate the cost impact of adding potential location sites to
the network of existing facilities is __________________________________________.
a) cost-volume analysis
b) the transportation method
c) factor rating analysis
d) linear regression analysis
e) the load-distance model
Ans: B
72. Capacity planning and location analysis are decisions that must be made by _______________ working
together.
a) accounting, marketing and operations
b) marketing and finance
c) finance, marketing and operations
d) accounting, marketing and finance
e) marketing and operations
Ans: C
73. Which of the following is not an example of factory focus?
a) Ann Taylor
b) Sears
c) Limited Too
d) The Gap
e) The Limited
Ans: B
74. Which of the following is not part of decision trees?
a) decision points
b) decision alternatives
c) decision events
d) chance events
e) outcomes
Ans: C
True/False

1. Capacity decisions at the strategic level include the size of workforce.

Ans: False
2. The first level of capacity planning is at the strategic level.
Ans: True
3. Capacity planning is complicated by the fact that capacity is usually purchased in chunks, rather than smooth
increments.
Ans: True

4. An example of an output measure of capacity is labor hours.

Ans: False
5. Input measures of capacity work better when a company produces a single product.
Ans: False
6. Scheduled machine maintenance is one of the determinants of effective capacity.
Ans: True
7. The maximum output rate that can be achieved by a facility under ideal conditions is design capacity.
Ans: True
8. Under ideal conditions the firm can achieve 125% of design capacity on a daily basis.
Ans: False
9. The ratio of actual output rate to capacity is utilization.
Ans: True
10. Extra capacity can serve to intimidate and preempt competitors from entering the market.
Ans: True
11. The best operating level is the volume of output that results in the lowest average unit cost.
Ans: True
12. A focused factory is one that produces many products with options.
Ans: False
13. Focused factories are a factor which contributes to the success of JIT.
Ans: True
14. A plant within a plant can perform a number of tasks to help a company focus on its core capabilities.
Ans: False
15. Capacity cushions can be helpful if sales need to be buffered from production.
Ans: False
16. Long-term capacity requirements are identified on the basis of forecasts of future labor market supplies.
Ans: False
17. Solving a decision tree that involves maximizing profit includes selecting the decision alternative with the
highest expected value.
Ans: True
18. The cost of space in Silicon Valley is higher now than it was in the late 1990s.
Ans: False
19. In facility location zoning restrictions, soil conditions, and access roads for trucks are quality of life issues.
Ans: False
20. Disadvantages of globalization include political risks for countries with unstable governments.
Ans: True
21. An excellent procedure that can be used with location factors that are qualitative is the factor rating method.
Ans: True
22. The load-distance model frequently utilizes rectilinear distance, which is the shortest distance between two
points using only north-south and east-west movements.
Ans: True
23. The center of gravity approach requires precise XY grid coordinates to develop a valid location.
Ans: False

24. In choosing a location, the transportation method provides an easy way to calculate X and Y coordinates for a
good starting point.
Ans: False
25. At the break-even point total cost equals total revenue.
Ans: True
Essay
1. Describe some factors that contribute to the capacity of an emergency room, as measured by the number of
patients served per day.
Ans: One factor is the number of beds in the ER and the amount of space available. If there are not enough beds,
patients may have to wait long periods of time to be examined. Too many empty beds, on the other hand,
would be a waste of space. Another factor is the number of nurses and doctors working on a shift. If not
enough staff is available, patients may not have anyone to treat them. The consequences of not having
enough capacity could be grave. However, scheduling more staff than needed would result in excess capacity
in the form of highly paid professionals not having work to do.
Section Ref: Capacity Planning
Level: moderate
2. What conditions make effective capacity differ from design capacity?
Ans: realistic work schedules and breaks, regular staff levels, scheduled machine maintenance, and none of the
temporary measures that are used to achieve design capacity
Section Ref: Capacity Planning
Level: hard
3. Why would a company consider purchasing or building a small facility, when in the long run they think that they
could use a large one?
Ans: risk that demand will not materialize
Section Ref: Capacity Planning
Level: hard
4. Two sizes are being considered for a new facility, medium and large. Discuss best operating level in this context.
Ans: The best operating level will vary with size of the facility. The average cost per unit will be lowest at the best
operating level for the large facility.
Section Ref: Capacity Planning
Level: hard
5. Why are focused factories often the best approach in todays business environment?
Ans: due to short product and technology life cycles, and the importance of flexibility
Section Ref: Capacity Planning
Level: moderate
6. How should forecasts of long-range demand be developed for identifying capacity requirements?
Ans: 1) forecast overall long-range market demand, 2) then estimate the companys market share as a percentage
of the total
Section Ref: Making Capacity Planning Decisions
Level: hard
7. There they go again. There is another Burger King being built right next to a McDonalds at an Interstate Highway
exit. Why does this approach make sense?
Ans: Customers will be drawn to that location by the availability of fast food restaurants.
Section Ref: Location Analysis
Level: moderate
8. Why does it make sense that there are many cheese factories that are staying in Wisconsin, while many clothing
manufacturers have been shutting down domestic plants and locating outside of the US?

Ans: Cheese is made from milk, and cheese factories are located near dairy farms to avoid the cost of transporting
the heavy milk long distances. The major cost in making clothes is labor, and labor costs tend to be high in
the U.S.
Section Ref: Location Analysis
Level: hard
9. Give an example of a type of facility for which quality-of-life issues would be of primary importance.
Ans: several possibilities, such as research and development facilities, corporate offices, universities, etc.
Section Ref: Location Analysis
Level: moderate
10. What are the disadvantages of globalization?
Ans: political risks in countries with unstable governments, need to share proprietary technology, bad attitudes on
the part of workers, lower worker productivity and skills, poor roads, lack of utilities and other infrastructure
problems
Section Ref: Location Analysis
Level: moderate
11. Discuss why marketing is important in making capacity decisions.
Ans: Marketing is the function that has information to future demands and competition. Each of these are critical for
future capacity planning.
Section Ref: Capacity Planning and Facility Location Across the Organization
Level: easy
12. Describe the relation of capacity requirement and the supply chain.
Ans: The supply chain is a pipeline that supplies a certain level of customer demand. This can only happen if the
supply chain capacity meets the demand requirements and is matched across the full supply chain.
Section Ref: The Supply Chain Link
Level: moderate
Short Answer
1. While long term capacity decisions are strategic and capital intense, short term capacity decisions involve
________________________
Ans: short-term issues of workforce, inventory, and machinery.
Section Ref: Capacity Planning
Difficulty: moderate
2. Capacity planning problems are notorious in ER and other organizations who experience ____ ______ in ____.
Ans: high fluctuations in demand
Section Ref: Capacity Planning
Difficulty: hard
3. Agile organizations often use focused factories to increase efficiency by ________________________
Ans: working on fewer tasks and goals.
Section Ref: Capacity Planning
Difficulty: moderate
4. Subcontractor networks reduce reliance on acceptance sampling by ________________________
Ans: increasing suppliers' responsibility for quality.
Section Ref: Capacity Planning
Difficulty: moderate
5. Forecasting product demand involves forecasting ________________________ demand and the firm's
________________________

Ans: market, market share

Section Ref: Making Capacity Planning Decisions
Difficulty: moderate
6. Name three of the main factors that affect location decisions. ________________________,
________________________, and ________________________.
Ans: Three of: proximity to suppliers, proximity to customers, proximity to qualified labor, community, site, quality of
life.
Section Ref: Location Analysis
Difficulty: moderate
7. Schools, colleges, and universities consider the size of the classrooms carefully because
________________________
Ans: an instructor may interact with one or many students.
Section Ref: Capacity Planning
Difficulty: hard
8. What is the formula for effective utilization? ________________________
Ans: (formula) U_e = actual output over capacity * 100
Section Ref: Capacity Planning
Difficulty: easy
9. A firm must choose between remaining where it is, with current capacity, and building a new facility with 50%
more capacity. The probability of high demand is estimated to be 75%. The current facility would provide $100,000
profit if there is high demand or $50,000 profit if there is low demand. The replacement facility would provide
$160,000,000 profit if there is high demand but would only break even if there is low demand. What is the expected
value of each option?________________________
Ans: For the replacement facility, .75*$160,000 + .25*0 = $120,000. For the current facility, .75*100,000 + .
25*$50,000 = $87,500.
Section Ref: Making Capacity Planning Decisions
Difficulty: hard
10. What is the load-distance score formula? ________________________
Ans: (formula) ld = sum l_ij times d_ij where l_ij is the weight carried from point i to j and d_ij is the distance from i
to j.
Section Ref: Location Analysis
Difficulty: hard
11. An area that has further encouraged globalization is the growth of __________.
Ans: just-in-time manufacturing
Section Ref: Section Ref: Location Analysis
Difficulty: hard
12. A firm that wishes to use break-even analysis to evaluate potential locations must know
________________________ for each site.
Ans: fixed cost, selling price, and variable cost.
Section Ref: Location Analysis
Difficulty: hard
13. Factor rating can be used to evaluate multiple _____ based on a number of ____ ____.
Ans: alternatives, selected factors
Section Ref: Making Location Decisions
Difficulty: moderate
Problems

1. A clinic has been set up to give flu shots to the elderly in a large city. The design capacity is 50 seniors per hour,
and the effective capacity is 44 seniors per hour. Yesterday the clinic was open for ten hours and gave flu shots to
330 seniors.
(a) What is the design utilization?
(b) What is the effective utilization?
Ans: a) 66%; (Design utilization = output/design capacity = 330/(10*50) = .66 or 66%)
b) 75% (Effective utilization = output/effective capacity = 330/(10*44) =.75 or 75%)
Section Ref: Capacity Planning
Level: easy
2. Magnatree is a large company that has been working on a new product. This product has tremendous potential,
but Magnatree must move quickly. They have decided that they will introduce the product in two months and have
already started developing their advertising campaign.
They are sure that the product will be a success, with a possibility that it will be a huge success. They recently
found out that another company, Shadycorp, has some unique expertise that could significantly improve the new
product. They contacted them and Shadycorp offered to sell their expertise to Magnatree for $5 million. Magnatree
needs to make an immediate decision on Shadycorps offer or it will be too late to investigate the use of the
expertise in design of the new product. Without the expertise Magnatree has a 20% chance of making the new
product a huge success. With Shadycorps expertise there will be a 40% chance of the new product being a huge
success.
If the new product is a huge success, the net present value of its future profits is expected to be $50 million. If it is
merely a success, the net present value of its future profits is expected to be $20 million.
(a) Construct a decision tree and solve it.
(b) Should Magnatree accept Shadycorps offer?
(c) What is the expected net present value of its future profits from the new product?
Ans: see below
(a)
--------Huge success (0.2)---|
---Reject offer-------- O
|
|

|
|
---Accept offer------- O

|
--------Success (0.8) -----------------Huge success (0.4)---|
|
--------Success (0.6) ----------

$50 million

$20 million
$45 million

$15 million

Calculate expected values

--------Huge success (0.2)---|
---Reject offer-------- O Expected value = $26 million
|
|
|
--------Success (0.8) --------- Accept offer - Expected value = $27 million
|
--------Huge success (0.4)---|
|
---Accept offer------- O Expected value = $27 million
|
--------Success (0.6) ---------(b) Magnatree should accept Shadycorps offer.
(c) The expected net present value of its future profits from the new product is $27 million.
Section Ref: Making Capacity Planning Decisions
Level: hard

$50 million

$20 million
$45 million

$15 million

3. Aacorp has experienced an increase in demand for its product and has decided that it will expand its factory,
since capacity is currently too low to meet demand. It is not sure whether demand will continue to increase in the
future or not. It is considering two options. A small expansion will be sufficient to meet its current demand and also
its future demand if demand levels off. Its second option is a large expansion, which will be more than sufficient for
current demand and will also handle future demand even if continues to increase. They have estimated that the
probability that demand will continue to increase is 40%.
A small expansion will cost $2 million while a large expansion will cost $4 million. If they make a small expansion
and demand continues to increase, they will have to make a second expansion in 18 months and the net present
value of that second expansion is $3 million.
The net present value of the future revenue resulting from the expansion will be $5 million under two conditions: 1)
demand levels off, or 2) demand continues to increase, but Aacorp chooses a small expansion and does not make
a second expansion in 18 months. The net present value of the future revenue will be $9 million if demand
continues to increase and Aacorp either chooses a large expansion or makes a second expansion in 18 months
after choosing a small expansion.
(a) Construct a decision tree and solve it.
(b) Should Aacorp make a small expansion or a large expansion?
(c) What is the resulting expected net present value of its future profits?
Ans: see below
(a)
------Expand again---------- $4 million (9-2-3)
|
---Demand increases (0.4)---
|
|
------Expand small----O
|
|
|

|
|
|
------Expand large----O

|
------No second expansion- $3 million (5-2)

|
|
---Demand levels off (0.6)------------------------------------ $3 million (5-2)
---Demand increases (0.4)------------------------------------ $5 million (9-4)
|
|
|
|
---Demand levels off (0.6)------------------------------------ $1 million (5-4)

Calculate expected values

------Expand again---------- $4 million (9-2-3)
|
---Demand increases (0.4)--- Choose Expand again - $4 million
|
|
|
------No second expansion- $3 million (5-2)
------Expand small----O Expected value = $3.4 million
|
|
|
|
|
---Demand levels off (0.6)------------------------------------ $3 million (5-2)
Expand small - Expected value = $3.4 million
|
---Demand increases (0.4)------------------------------------ $5 million (9-4)
|
|
|
|
------Expand large----O Expected value = $2.6 million
|
|
---Demand levels off (0.6)------------------------------------ $1 million (5-4)
(b) Aacorp should make a small expansion.
(c) The resulting expected net present value of its future profits is $3.4 million.
Section Ref: Making Capacity Planning Decisions

Level: moderate

4. Medco plans to open a new medical center and is looking for a suitable location. They have narrowed their choice
down to three locations, on Oak, Elm, and Ash Streets. They have defined four factors and have assigned weights
to these factors as follows: proximity to hospitals (40), customer parking (30), appearance (20), and ease of
expansion (10). They then rated the three locations for the four factors, using a scale of one to five. Their ratings are
as follows:
Factor

Oak

Location
Elm

Proximity to hospitals
2
5
Customer parking
5
Appearance
4
2
Ease of expansion
3
4
(a) Calculate the scores for each location.
(b) According to the model which location should they choose?

Ash
3
1

3
5
1

Ans: (a) Oak - 340, Elm - 310, Ash - 320; (b) choose Oak
Section Ref: Making Location Decisions
Level: moderate

5. Supershirtco plans to open a new factory and is looking for a suitable location. They have narrowed their choice
down to three locations, Lima, Peru; Rome, Italy; and Nome, Alaska. They have defined four factors and have
assigned weights to these factors as follows: wage rates (60), construction costs (20), logistics (10), and climate
(10). They then rated the three locations for the four factors, using a scale of one to five. Their ratings are as
follows:
Factor

Lima

Location
Rome

Wage rates
5
3
Construction costs
4
2
Logistics
3
2
Climate
3
5
(a) Calculate the scores for each location.
(b) According to the model which location should they choose?

Nome
1
5
5
1

Ans: (a) Lima - 440, Rome - 290, Nome - 220; (b) choose Lima
Section Ref: Making Location Decisions
Level: moderate

6. Aalogistics Co. has just signed a contract to deliver products to three locations, and they are trying to decide
where to put their new warehouse. The three delivery locations are Chicago, Kansas City, and Memphis. The two
potential sites for the warehouse are Peoria and St. Louis. The x, y coordinates for the delivery locations and
warehouses are as follows:
Location
Chicago
Kansas City
Memphis
Peoria
St. Louis

x coordinate
92
85
90
90
90

y coordinate
42
39
35
41
39

The total quantity to be delivered to each destination is: 400 to Chicago, 150 to Kansas City, and 100 to Memphis.
(a) Calculate the total load-distance value from each potential warehouse location.
(b) Where should the new warehouse be located?

Ans: (a) load-distance for Peoria - 2,850, load-distance for St. Louis - 3,150; (b) in Peoria
Section Ref: Making Location Decisions
Level: moderate

7. Wefixit Co. has just signed a contract to handle copy machine repairs for a large printing company in Chicago.
The contract covers copy machines at four locations, in the Loop (downtown), on the North side, on the West side,
and on the South side. Wefixit has identified two potential sites for housing their equipment, spare parts, and
employees. One site is Northwest of the Loop, and the other on is south of the Loop. The x, y coordinates for the
printing company locations and potential sites for Wefixit are as follows:
Type
Printing
Printing
Printing
Printing
Wefixit
Wefixit

Co.
Co.
Co.
Co.

Location
x coordinate
Loop
24
North side
19
West side
11
South side
27
Northwest of Loop
18
South of Loop
24

y coordinate
18
27
19
11
23
16

The estimate number of trips per year to each Printing Co. location is: 400 to Loop, 200 to North side, 200 to West
side and 100 to South side.
(a) Calculate the total load-distance value from each potential Wefixit location.
(b) Where should Wefixit be located?
Ans: (a) load-distance for Northwest - 9,700, load-distance for South - 8,000; (b) South
Section Ref: Making Location Decisions
Level: moderate

8. Aalogistics Co. has just signed a contract to deliver products to three locations, and they are trying to decide
where to put their new warehouse. The three delivery locations are Chicago, Kansas City, and Memphis. The x, y
coordinates for the delivery locations are as follows:
Location
Chicago
Kansas City
Memphis

x coordinate
92
85
90

y coordinate
42
39
35

The total quantity to be delivered to each destination is: 400 to Chicago, 150 to Kansas City, and 100 to Memphis.
Calculate the location of the new warehouse using the Center of Gravity approach.
Ans: x = 90.1, y = 40.2
Section Ref: Making Location Decisions
Level: moderate

9. Phils consulting services has grown rapidly. Phil is now traveling extensively around the country. Phil has the
liberty to live anywhere he wants but wants to decide, geographically, the ideal location to relocate to. Phils primary
clients and associated number of trips are:
Client A = 15 trips, coordinates (20,80)
Client B = 40 trips, coordinates (30,60)
Client C = 35 trips, coordinates (40,70)
Client D = 25 trips, coordinates (50,90)
Ans: (36.1,72.2) Xc.g.=liXi/l i= (15*20 + 40*30 + 35* 40 = 25* 50) = 36.1
70 = 25* 90 = 72.2
Section Ref: Making Location Decisions
Level: moderate

Yc.g.=liYi /l i = 15*80 + 40*60 + 35*

10. Amalagamatada HOH, Inc., makes water treatment machines for homes. These machines are referred to as
AmaHOH, and Amalagamatada HOH, Inc. is trying to decide whether or not to built a new plant in Southern
California. The plant will have annual fixed costs of $2,000,000 and variable costs of $800 for each AmaHOH
produced. The sales price is $1,000 for each AmaHOH.
(a) Determine the break-even quantity.
(b) Marketing is certain that they will be able to sell much more than the break-even quantity in part a. and have
proposed building an even larger plant. This plant will have annual fixed costs of $5,000,000 and variable costs of
$700 for each AmaHOH produced. The sales price will still be $1,000 for each AmaHOH. Determine the quantity
above which the larger plant should be built, rather than the plant in part a.
Ans: (a) 10,000; (b) 30,000
Section Ref: Making Location Decisions
Level: easy

11. Acme Corp. makes vending machines for small companies. They have recently started selling their vending
machines in Southern California, with a great deal of success, at a price of $5,000 per machine. The company is
convinced that they will need to either build a new plant near San Diego or expand their existing plant in New
Orleans. If they build a new plant near San Diego, the annual fixed costs will be $6,000,000 and the variable costs
will be $3,000 for each vending machine delivered to Southern California. If they expand the New Orleans plant,
their annual fixed costs for the expansion will be $2,000,000 and the variable costs will be $4,000 for each vending
machine delivered to Southern California.
(a) Determine the break-even quantity for building the new plant near San Diego.
(b) Determine the break-even quantity for expanding the plant in New Orleans.
(c) At what output will the two locations have the same total cost?
(d) Assume that the demand forecast is less than the output in part c. Which option should the company choose?
Ans: (a) 3,000; (b) 2,000, (c) 4,000; (d) Expand the plant in New Orleans
Section Ref: Making Location Decisions
Level: moderate

12. Raissas early learning center must decide how many students they need to enroll to make a profit. There is a
trade off in quality of care and the number of students enrolled. They must make a profit but not have so many
children that the care suffers. They must establish the point where the number of enrolled students establishes the
first profit point. Theyve determined that their fixed costs are $4,500 per month. It costs them an additional $150
per month for each enrolled child. They only enroll students on a monthly basis at a price of $450. How many
students must they enroll to start making a profit?
Ans: 15 students Q = FC/(p-c) = $4,500/($450 - $150) = 15
Section Ref: Making Location Decisions
Level: easy