Fill-in-the-blank

45. ____________ is the amount a facility can hold, store, receive, or produce in a period of time.

Throughput or Capacity (Capacity, moderate)

46. ____________ is actual output as a percent of design capacity.

Utilization (Capacity, moderate)

47. ____________ is actual output as a percent of effective capacity.

Efficiency (Capacity, moderate)

48. In the service sector, scheduling customers is ____________, and scheduling the workforce is ____________.

Demand management; capacity management (Capacity, moderate)

49. The capacity planning strategy that delays adding capacity until capacity is below demand, then adds a capacity increment so that capacity is above demand, is said to____________ demand.

Average or straddle (Capacity, moderate)

50. _______________ analysis finds the point at which cost equals revenues.

Break-even (Break-even analysis, moderate)

51. _________ cost is the cost that continues even if no units are produced.

Fixed (Break-even analysis, moderate)

52. Multiproduct break-even analysis calculates the __________ of each product, __________ it in proportion to each product's share of total sales.

Contribution; weighting (Break-even analysis, moderate)

53. _____________ is a means of determining the discounted value of a series of future cash receipts.

Net present value or NPV (Applying investment analysis to strategy-driven investments, moderate)

SHORT ANSWERS

54. Some organizations use number of beds, number of rooms, or room size to measure capacity. There's no time period in this capacity, and no "throughput." Why are these firms using such a different concept of capacity?
Student answers will vary, since the answer is not explicitly covered in text. But it is a natural extension of what students know about services. It's easy for Krispy Kreme to say they produced 40,000 doughnuts in a day. But these firms may deliver services that are hard to quantify or add up, perhaps because each service is unique. So rather than measure produced output, they focus on certain inputs that are critical to their ability to serve customers. (Capacity, difficult) {AACSB: Reflective Thinking}

55. What is the fundamental distinction between design capacity and effective capacity? Provide a brief example.

Design capacity is the theoretical maximum output of a system in a given period under ideal conditions. Effective capacity, on the other hand, is the capacity that a firm expects to achieve given the current operating constraints. Effective capacity is often lower than design capacity because the facility may have been designed for an earlier version of the product or a different product mix than is currently being produced. As an example, a restaurant might have 100 seats, but it only opens up 60 every night because it cannot find enough qualified servers. (Capacity, moderate)

56. Distinguish between utilization and efficiency.

Both are ratios, not item counts. Both use actual output in the ratio numerator. Utilization is the ratio of actual output to design capacity, so it measures output as a fraction of ideal facility usage. Efficiency is the ratio of actual output to effective capacity, so it measures output as a fraction of the practical or current limits of the facility. (Capacity, moderate)

57. Why is the capacity decision important?
The capacity decision is important for several reasons. First, capacity costs represent a large portion of fixed costs. Second, a facility of the wrong size means that costs are not as low as they could be. If a facility is too large, and portions of it remain idle, the firm's costs are too high because of the higher fixed costs. If a plant is too small, costs are again higher than they might be due to inefficiencies of working in cramped and crowded spaces. Further, a facility too small may lead to lost sales, perhaps even lost markets. (Capacity, moderate)

58. A good capacity decision requires that it be tightly integrated with the organization's strategy and investments. But there are other "considerations" to making a good capacity decision. Name them. Describe each in a sentence or two.
The four considerations are forecast demand accurately, understand the technology and capacity increments, find the optimum operating level (volume), and build for change. Without a good demand forecast, no firm can expect to build a facility of the proper size. In some cases capacity can be obtained in small amounts, but in others, to add capacity might require an entire building or production line. There is an optimum operating level, at which average unit costs are least. That volume is found through the analysis of economic cost curves. Finally, the firm needs a plan for adding capacity as demand grows; this plan can lead demand, lag demand, or straddle demand. (Capacity, moderate)

59. A sugar mill receives sugar cane from farmers, extracts the juice, boils it into syrup, and then crystallizes the syrup into raw sugar. There has been an ongoing consolidation of sugar mills, and an increase in the capacity of those that remain. The number of mills in Louisiana was 48 in the 1960s, was 18 in 1999 and is currently 13. In 1999 the break-even point for a typical mill was 600,000 tons. But as the surviving mills have added capacity, the break-even point is now 1,000,000 tons. In 1999, the state's farmers produced 16,000,000 tons of cane, but by 2004, the crop was down to 13,000,000 tons. Analyze this situation with what you have learned about the capacity decision. Is the industry better off with fewer but larger mills, or not?

There are several possible paths students can take. The most obvious is the economic argument that economies of scale call for ever larger plants. Students may want to address the lead, lag, or straddle strategies of growing to meet demand. But demand is not growing very much —it's up from 890,000 tons per mill to 1,000,000 tons per mill over 5 years. Students may alternately try to analyze the considerations of matching capacity to demand, and describe pricing strategies or internal changes to meet demand. But the broadest view suggests that the industry (not individual mills!) operated somewhat above break-even in 1999, but is squarely at break-even now. The increased capacities do not seem much of an improvement. This question is drawn from an article in the New Orleans Times-Picayune, 30 January 2005. (Capacity, difficult) {AACSB: Reflective Thinking}

60. Identify the tactics for matching capacity to demand.

Making staffing changes (increasing or decreasing the number of employees), 2. Adjusting equipment (purchasing additional machinery or selling or leasing out existing equipment), 3. Improving processes to increase throughput, 4. Redesigning products to facilitate more throughput, 5. Adding process flexibility to better meet changing product preferences, and 6. Closing facilities. (Capacity, moderate)

61. Define fixed costs.

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