Chapter 5

Capacity
Planning
 Capacity Planning
• Capacity is the upper limit or ceiling
on the load that an operating unit can
handle.
• The basic questions in capacity
handling are:
– What kind of capacity is needed?
– How much is needed?
– When is it needed?
Importance of Capacity Decisions
• Impacts ability to meet future demands
• Affects operating costs
• Major determinant of initial costs
• Involves long-term commitment
• Affects competitiveness
• Affects ease of management
 Capacity
• 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.
 Efficiency and Utilization
Actual output
Efficiency =
Effective capacity

Actual output
Utilization =
Design capacity
 Efficiency/Utilization Example
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day

Actual output = 36 units/day

Efficiency = = 90%
Effective capacity 40 units/ day

Utilization = Actual output = 36 units/day = 72%

Design capacity 50 units/day

 Determinants of Effective
Capacity
• Facilities
• Products or services
• Processes
• Human considerations
• Operations
• External forces
Some Possible Growth Patterns
Figure 5-1
Volume

Volume
Growth Decline

0 Time 0 Time

Cyclical Stable

Volume
Volume

0 0
Time Time
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
 Evaluating Alternatives
Figure 5-3
Production units have an optimal rate of output for minimal cost.
Average cost per unit

Minimum
cost

0 Rate of output
 Evaluating Alternatives
Figure 5-4
Minimum cost & optimal operating rate are
functions of size of production unit.
Average cost per unit

Small
plant Medium
plant Large
plant

0 Output rate
 Planning Service Capacity

• Need to be near customers

– Capacity and location are closely tied
• Inability to store services
– Capacity must me matched with timing of
demand
• Degree of volatility of demand
– Peak demand periods
 Calculating Processing
Requirements
S t a n d a r d
A n n u p a r l o c e s s i Pn gr o tc i me s e s i
P r o d uD c e t m a pn ed r u n i t (n h e r e. ) d e d

# 1 4 0 0 5 . 0 2 , 0 0

# 2 3 0 0 8 . 0 2 , 4 0

# 3 7 0 0 2 . 0 1 , 4 0
5 , 8 0
 Cost-Volume Relationships
Figure 5-5a

F C
+
Amount ($)

VC C)
st
= t (V
s
co co
t al l e
o i a b
T ar
l v
t a
To
Fixed cost (FC)

0
Q (volume in units)
 Cost-Volume Relationships
Figure 5-5b

ue
en
Amount ($)

rev
tal
To

0
Q (volume in units)
 Cost-Volume Relationships
Figure 5-5c

u e
e n f i t
Amount ($)

ev ro
r P
al t
t o s
To t a l c
To

0 BEP units
Q (volume in units)
 Break-Even Problem with Step
Fixed Costs
Figure 5-6a

C =
+ V
FC
TC
= TC
V C
+
FC 3 machines
T C
C =
V
C + 2 machines
F

1 machine
Quantity
Step fixed costs and variable costs.
 Break-Even Problem with Step
Fixed Costs
Figure 5-6b

$
BE
P 3
TC
BEP2
TC
3
TC
2
TR 1
Quantity
Multiple break-even points
 Assumptions of Cost-Volume
Analysis
• One product is involved
• Everything produced can be sold
• Variable cost per unit is the same
regardless of volume
• Fixed costs do not change with volume
• Revenue per unit constant with volume
• Revenue per unit exceeds variable cost
per unit
 Financial Analysis

• Cash Flow - the difference between

cash received from sales and other
sources, and cash outflow for labor,
material, overhead, and taxes.
• Present Value - the sum, in current
value, of all future cash flows of an
investment proposal.