Practice Problems: Supplement 7, Capacity Planning
Problem 1:
The design capacity for engine repair in our company is 80 trucks/day. The effective capacity is 40 engines/day and the actual output is 36 engines/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?
Problem 2:
Given:
Find the break-even point in $ and in units.
Problem 3:
Develop the break-even chart for Problem 2.
Problem 4:
Jack’s Grocery is manufacturing a “store brand” item that has a variable cost of $0.75 per unit and a selling price of $1.25 per unit. Fixed costs are $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 $5,000. Variable cost would increase to $1.00, but their volume should increase to 70,000 units due to the higher quality product. Should the company buy the new equipment?
Problem 5:
What are the break-even points ($ and units) for the two processes considered in Problem 4?
Problem 6:
Develop a break-even chart for Problem 4.
Problem 7:
Good News! You are going to receive $6,000 in each of the next 5 years for sale of used machinery. A bank is willing to lend you the present value of the money in the meantime at discount of 10% per year. How much cash do you receive now?
ANSWERS:
Problem 1:
Problem 2:
Problem 3:
Problem 4:
Profit = TR – TC
Option A: Stay as is:
Option B: Add equipment:
Therefore the company should continue as is with the present equipment as this returns a higher profit..
Problem 5:
Using current equipment:
Using the new equipment
Problem 6:
Problem 7:
The net present value factor for 10% and 5 years is 3.79
Therefore, the present value is:
The Bad News is you do have to pay back the loans!
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