ILLUSTRATIVE PROBLEMS IN

STRATEGIC CAPACITY
PLANNING FOR PRODUCTS
AND SERVICES
SAMPLE PROBLEM ON MEASURES OF
SYSTEM EFFECTIVENESS
In a job shop, effective capacity is only 50 percent
of design capacity, and actual output is 80 percent
of effective output. What design capacity would be
needed to achieve an actual output of eight jobs
per week?
Given:
Effectivecapacity = 0.50*Design capacity
Actual output = 0.80*Effective capacity

Actual output = 8 jobs per week

SAMPLE PROBLEM ON MEASURES OF
SYSTEM EFFECTIVENESS
We are given the actual output of 8 jobs per week and
actual output expressed in terms of effective capacity. We
can equate the two.
Actual output = Actual output
8 jobs per week = 0.80*Effective capacity
Effective capacity = 8 jobs 0.80 = 10 jobs

Next, we are given effective capacity in terms of design

capacity. We can also equate the two.
Effective capacity = Effective capacity
0.50*Design capacity = 10 jobs
Design capacity = 10 jobs 0.50 = 20 jobs.
SAMPLE PROBLEM ON CAPACITY
REQUIREMENTS
To know the capacity requirements of a system or a
process, one needs the following:
Accuratedemand forecast for each product
Standard processing time per unit for each product

Number of workdays per year

Number of shifts per workday

Number of working hours per shift

SAMPLE PROBLEM ON CAPACITY
REQUIREMENTS
A manager must decide which type of machine to buy, A, B, or C. Machine
costs are as follows: Machine Cost
A $40,000
B $30,000
C $80,000
Product forecasts and processing times on the machines are as follows:

PROCESSING TIME PER UNIT

Annual (MINUTES)
Product
Demand
A B C
1 16,000 3 4 2
2 12,000 4 4 3
3 6,000 5 6 4
4 30,000 2 2 1
a. Assume that only purchasing costs are being
considered. Which machine would have the lowest
total cost, and how many of that machine would be
needed? Machines operate 10 hours a day, 250 days
a year.
b. Consider this additional information: The machines
differ in terms of hourly operating costs: The A
machines have an hourly operating costs of $10 each,
B machines have an hourly operating cost of $11
each, and C machines have an hourly operating cost
of $12 each. Which alternative would be selected,
and how many machines, in order to minimize total
cost while satisfying capacity requirements?
 Given:
Machine cost
Annual Demand for each product

Processing time per unit of each product in each

machine
Operating hours of 10 hours a day, 250 days a year

Hourly operating cost for each machine

 To determine which machine gives the lowest total
cost, we need to know available supply and
demand.
SUPPLY = DEMAND
Supply is number of hours available given the
operating hours a day and number of days a year.
At the given operating hours,
Supply = 10 hours/day * 250 days/year = 2500
hours/year this is the available number of hours
for each machine
 Next, we need to determine actual number of hours each machine needs to
process all units at the level of annual demand.
For Machine A,
Product (1) (2) (3) = (1) * (2)
Annual Processing Total Number of
Demand Time, minutes Minutes to Satisfy
Annual Demand
1 16,000 3 48,000
2 12,000 4 48,000
3 6,000 5 30,000
4 30,000 2 60,000
186,000 minutes
Converting the 186,000 minutes to hours gives us 3,100 hours a year.
Comparing 2,500 hours available against 3,100 hours requirements, it is
obvious that we need two units of machine A.
 Next, we need to determine actual number of hours each machine needs to
process all units at the level of annual demand.
For Machine B,
Product (1) (2) (3) = (1) * (2)
Annual Processing Total Number of
Demand Time, minutes Minutes to Satisfy
Annual Demand
1 16,000 4 64,000
2 12,000 4 48,000
3 6,000 6 36,000
4 30,000 2 60,000
208,000 minutes
Converting the 186,000 minutes to hours gives us 3,467 hours a year.
Comparing 2,500 hours available against 3,467 hours requirements, it is
obvious that we need two units of machine B.
 Next, we need to determine actual number of hours each machine needs to
process all units at the level of annual demand.
For Machine C,
Product (1) (2) (3) = (1) * (2)
Annual Processing Total Number of
Demand Time, minutes Minutes to Satisfy
Annual Demand
1 16,000 2 32,000
2 12,000 3 36,000
3 6,000 4 24,000
4 30,000 1 30,000
122,000 minutes
Converting the 186,000 minutes to hours gives us 2,033 hours a year.
Comparing 2,500 hours available against 2,033 hours requirements, it is
obvious that we only need one unit of machine C.
 b. Which machine to buy if operating cost is considered
on top of purchasing cost?
Total Cost = Purchasing Cost + Total Operating Cost

Machine Number Cost/Unit Purchasing Processing Hourly Total Total Cost

of Units Cost Hours Operating Operating
Cost Cost
A 2 $40,000 $80,000 3,100 $10 $31,000 $111,000
B 2 $30,000 $60,000 3,467 $11 $38,137 $98,137
C 1 $80,000 $80,000 2,033 $12 $24,396 $104,396

We need to buy two units of machine B.

SAMPLE PROBLEM ON COST-VOLUME
ANALYSIS
A real estate agent is considering changing her cell phone plan. There are
three plans to choose from, all of which involves a weekly service charge of
$20. Plan A has a cost of $0.45 a minute for daytime call and $0.20 a minute
a minute for evening calls. Plan B has a charge of $0.55 a minute for daytime
calls and $0.15 a minute for evening calls. Plan C has a flat rate of $80 with
200 minutes of calls allowed per week and a charge of $0.40 per minute
beyond that, day or evening.
a) Determine the total charge under each plan for this case: 120 minutes of
day calls and 40 minutes of evening calls in a week.
b) Prepare a graph that shows total weekly cost for each plan versus
daytime call minutes.
c) If the agent will use the service for daytime calls, over what range of call
minutes will each plan be optimal?
d) Suppose that the agent expects both daytime and evening calls. At what
point (i.e., percentage of call minutes for daytime calls) would she be
indifferent between plans A and B?
 Given:
Fixedcost = $20 per week
Variable Costs
Plan A: $0.45/minute for daytime calls; $0.20/minute for
evening calls
Plan B: $0.55/minute for daytime calls; $0.15/minute for
evening calls
Plan C: $80 for the first 200 minutes, $0.40 beyond 200
minutes
a) Total Charge for each plan at 120 minutes of day
calls and 40 minutes of evening calls
Total Charge = Fixed charge + Cost of daytime calls
+ Cost of evening calls
Fixed Charge Daytime calls Evening Calls Total Charge
Plan A $20 120 minutes 40 minutes $82
*$0.45/minute *$0.20/minute
= $54 = $8
Plan B $20 120 40 $92
minutes*$0.55/ minutes*$0.15/
minute minute
= $66 = $6
Plan C $20 $80 $100
b) 140
119
120
100 100
Total Charge, $

80 101
80 66
Plan A
60 Plan B
40 54 Plan C
20
20
0
0 120 180
Daytime Calls, in minutes per week
c) If the agent will use the service for daytime calls, over what range of call minutes will each plan
be optimal?
From the graph,
We can see that Plan A is always cheaper than Plan B
There is a point where Plan C is better than Plan B
There is also a point where Plan C is better than Plan A
Total Charge for A = Total Charge for C
20 + 0.45x = 20 + 80
X = 177.78 min 178 minutes
Below 178 minutes, Plan A is cheaper. Above 178 minutes, Plan C is cheaper.
Total Charge for B = Total Charge for C
20 + 0.55x = 20 + 80
X 145 minutes; choosing between Plan B and Plan C, Plan B is cheaper than Plan C if
consumption is below 145 minutes. Beyond 145 minutes, Plan C is cheaper.
However, Plan B at 145 minutes is more expensive than Plan A.
The optimal choice is Plan A if consumption is from 0 to 178 minutes.
d) Suppose that the agent expects both daytime and
evening calls. At what point (i.e., percentage of call
minutes for daytime calls) would she be indifferent
between plans A and B?

Total Charge for A = Total Charge for B

20 + (.45x + .20y) = 20 + (.55x + .15y)
.45x -.55x = -.20y +.15y
-0.10x = -.05y
x = 0.5y
That is, daytime calls should only be half of evening calls.
ASSIGNMENT
The manager of a car wash must decide whether to
have one or two wash lines. One line will mean a
fixed cost of $6,000 a month, and two lines will
mean a fixed cost of $10,500 a month. Each line
would be able to process 15 cars an hour. Variable
costs will be $3 per car, and revenue will be $5.95
per car. The manager projects an average demand
of between 14 and 18 cars an hour. Would you
recommend one or two lines? The car wash is open
300 hours a month.