File: ch09, 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
Section Ref: Capacity Planning
Level: moderate

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
Section Ref: Capacity Planning
Level: moderate

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
Section Ref: Capacity Planning
Level: easy

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
Section Ref: Capacity Planning
Level: moderate

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
Section Ref: Capacity Planning
Level: moderate

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
Section Ref: Capacity Planning
Level: moderate

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
Section Ref: Capacity Planning
Level: hard

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
Section Ref: Capacity Planning
Level: moderate

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
Section Ref: Capacity Planning
Level: easy

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
Section Ref: Capacity Planning
Level: moderate

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
Section Ref: Capacity Planning
Level: moderate

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
Section Ref: Capacity Planning
Level: moderate

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
Section Ref: Capacity Planning
Level: moderate

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
Section Ref: Capacity Planning
Level: moderate

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
Section Ref: Capacity Planning
Level: moderate

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
Section Ref: Capacity Planning
Level: moderate

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
Section Ref: Capacity Planning
Level: moderate

18. The ratio of actual output rate to capacity is ____________________________.

a) effectiveness
b) cycle time
c) throughput
d) utilization
e) productivity

Ans: d
Section Ref: Capacity Planning
Level: easy

19. capacity can serve to intimidate and preempt competitors from entering the
market.
a) Design
b) Flexible
c) Extra
d) Effective
e) Focused

Ans: c
Section Ref: Capacity Planning
Level: hard
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
Section Ref: Capacity Planning
Level: moderate

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
Section Ref: Capacity Planning
Level: moderate

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
Section Ref: Capacity Planning
Level: moderate

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
Section Ref: Capacity Planning
Level: moderate
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
Section Ref: Capacity Planning
Level: moderate

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
Section Ref: Capacity Planning
Level: hard

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
Section Ref: Capacity Planning
Level: hard

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
Section Ref: Capacity Planning
Level: moderate

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
Section Ref: Capacity Planning
Level: moderate

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
Section Ref: Capacity Planning
Level: easy

30. Large facilities can benefit from the concept of by creating a plant within a
plant (PWP).
a) just-in-time
b) focused factories
c) economies of scale
d) supply chain
e) hierarchical management

Ans: b
Section Ref: Capacity Planning
Level: hard
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
Section Ref: Capacity Planning
Level: hard

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
Section Ref: Capacity Planning
Level: hard

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
Section Ref: Capacity Planning
Level: hard

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
Section Ref: Capacity Planning
Level: hard

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
Section Ref: Making Capacity Planning Decisions
Level: moderate

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
Section Ref: Making Capacity Planning Decisions
Level: moderate

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
Section Ref: Making Capacity Planning Decisions
Level: hard

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
Section Ref: Decision Trees
Level: hard

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
Section Ref: Decision Trees
Level: hard

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
Section Ref: Decision Trees
Level: hard

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
Section Ref: Decision Trees
Level: hard

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
Section Ref: Decision Trees
Level: hard

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
Section Ref: Location Analysis
Level: moderate

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
Section Ref: Location Analysis
Level: easy

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
Section Ref: Location Analysis
Level: moderate
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
Section Ref: Location Analysis
Level: moderate

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
Section Ref: Location Analysis
Level: hard

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
Section Ref: Location Analysis
Level: easy

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
Section Ref: Location Analysis
Level: hard
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
Section Ref: Location Analysis
Level: easy

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
Section Ref: Location Analysis
Level: moderate

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
Section Ref: Location Analysis
Level: easy

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
Section Ref: Location Analysis
Level: moderate

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
Section Ref: Location Analysis
Level: moderate

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
Section Ref: Location Analysis
Level: moderate

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
Section Ref: Location Analysis
Level: moderate

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
Section Ref: Making Location Decisions
Level: moderate

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
Section Ref: Making Location Decisions
Level: moderate

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
Section Ref: Making Location Decisions
Level: moderate

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
Section Ref: Making Location Decisions
Level: moderate

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
Section Ref: Making Location Decisions
Level: moderate

62. The load-distance model frequently utilizes distance, which is the shortest
distance between two points using only north-south and east-west movements.
a) curvilinear
b) Euclidean
c) rectilinear
d) direct
e) vertical

Ans: c
Section Ref: Making Location Decisions
Level: hard

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
Section Ref: Making Location Decisions
Level: moderate

64. In choosing a location, the provides an easy way to calculate X and Y

coordinates for a good starting point.
a) transportation method
b) break-even approach
c) factor rating method
d) center of gravity approach
e) load-distance method

Ans: d
Section Ref: Making Location Decisions
Level: moderate

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
Section Ref: Making Location Decisions
Level: easy

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
Section Ref: Making Location Decisions
Level: hard

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
Section Ref: Making Location Decisions
Level: moderate

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
Section Ref: Making Location Decisions
Level: easy

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
Section Ref: Making Location Decisions
Level: moderate

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
Section Ref: Making Location Decisions
Level: easy

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
Section Ref: Making Location Decisions
Level: moderate

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
Section Ref: Capacity Planning and Facility Location Across the Organization
Level: hard

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
Section Ref: Capacity Planning
Level: hard

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
Section Ref: Decision Trees
Level: hard

True/False

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

Ans: False
Section Ref: Capacity Planning
Level: moderate

2. The first level of capacity planning is at the strategic level.

Ans: True
Section Ref: Capacity Planning
Level: moderate
3. Capacity planning is complicated by the fact that capacity is usually purchased in chunks, rather
than smooth increments.

Ans: True
Section Ref: Capacity Planning
Level: moderate

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

Ans: False
Section Ref: Capacity Planning
Level: easy

5. Input measures of capacity work better when a company produces a single product.

Ans: False
Section Ref: Capacity Planning
Level: moderate

6. Scheduled machine maintenance is one of the determinants of effective capacity.

Ans: True
Section Ref: Capacity Planning
Level: hard

7. The maximum output rate that can be achieved by a facility under ideal conditions is design
capacity.

Ans: True
Section Ref: Capacity Planning
Level: moderate

8. Under ideal conditions the firm can achieve 125% of design capacity on a daily basis.

Ans: False
Section Ref: Capacity Planning
Level: moderate
9. The ratio of actual output rate to capacity is utilization.

Ans: True
Section Ref: Capacity Planning
Level: easy

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

Ans: True
Section Ref: Capacity Planning
Level: hard

11. The best operating level is the volume of output that results in the lowest average unit cost.

Ans: True
Section Ref: Capacity Planning
Level: moderate

12. A focused factory is one that produces many products with options.

Ans: False
Section Ref: Capacity Planning
Level: hard

13. Focused factories are a factor which contributes to the success of JIT.

Ans: True
Section Ref: Capacity Planning
Level: moderate

14. A plant within a plant can perform a number of tasks to help a company focus on its core
capabilities.

Ans: False
Section Ref: Capacity Planning
Level: hard

15. Capacity cushions can be helpful if sales need to be buffered from production.
Ans: False
Section Ref: Making Capacity Planning Decisions
Level: hard

16. Long-term capacity requirements are identified on the basis of forecasts of future labor market
supplies.

Ans: False
Section Ref: Making Capacity Planning Decisions
Level: hard

17. Solving a decision tree that involves maximizing profit includes selecting the decision
alternative with the highest expected value.

Ans: True
Section Ref: Decision Trees
Level: hard

18. The cost of space in Silicon Valley is higher now than it was in the late 1990s.

Ans: False
Section Ref: Location Analysis
Level: moderate

19. In facility location zoning restrictions, soil conditions, and access roads for trucks are quality
of life issues.

Ans: False
Section Ref: Location Analysis
Level: moderate

20. Disadvantages of globalization include political risks for countries with unstable governments.

Ans: True
Section Ref: Location Analysis
Level: moderate

21. An excellent procedure that can be used with location factors that are qualitative is the factor
rating method.
Ans: True
Section Ref: Making Location Decisions
Level: moderate

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
Section Ref: Making Location Decisions
Level: moderate

23. The center of gravity approach requires precise XY grid coordinates to develop a valid
location.

Ans: False
Section Ref: Making Location Decisions
Level: moderate

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
Section Ref: Making Location Decisions
Level: moderate

25. At the break-even point total cost equals total revenue.

Ans: True
Section Ref: Making Location Decisions
Level: easy

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)---- $50 million

|
---Reject offer-------- O
| |
| --------Success (0.8) ---------- $20 million

| --------Huge success (0.4)---- $45 million
| |
---Accept offer------- O
|
--------Success (0.6) ---------- $15 million

Calculate expected values

--------Huge success (0.2)---- $50 million

|
---Reject offer-------- O Expected value = $26 million
| |
| --------Success (0.8) ---------- $20 million
Accept offer - Expected value = $27 million
| --------Huge success (0.4)---- $45 million
| |
---Accept offer------- O Expected value = $27 million
|
--------Success (0.6) ---------- $15 million
(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
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)---
| |
| ------No second expansion- $3 million (5-2)
------Expand small----O
| |
| |
| ---Demand levels off (0.6)------------------------------------ $3
million (5-2)

| ---Demand increases (0.4)------------------------------------ $5
million (9-4)
| |
| |
------Expand large----O
|
|
---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:

Location
Factor Oak Elm Ash

Proximity to hospitals 2 5 3
Customer parking 5 1 3
Appearance 4 2 5
Ease of expansion 3 4 1
(a) Calculate the scores for each location.
(b) According to the model which location should they choose?

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:

Location
Factor Lima Rome Nome

Wage rates 5 3 1
Construction costs 4 2 5
Logistics 3 2 5
 Climate 3 5 1
(a) Calculate the scores for each location.
(b) According to the model which location should they choose?

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 x coordinate y coordinate

Chicago 92 42
Kansas City 85 39
Memphis 90 35
Peoria 90 41
St. Louis 90 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 Location x coordinate y coordinate

Printing Co. Loop 24 18
Printing Co. North side 19 27
Printing Co. West side 11 19
Printing Co. South side 27 11
Wefixit Northwest of Loop 18 23
Wefixit South of Loop 24 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 x coordinate y coordinate

Chicago 92 42
Kansas City 85 39
Memphis 90 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/li= (15*20 + 40*30 + 35* 40 = 25* 50) = 36.1 Yc.g.=liYi /li
= 15*80 + 40*60 + 35* 70 = 25* 90 = 72.2
Section Ref: Making Location Decisions
Level: moderate

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