OPERATIONS

MANAGEMENT
Chapter - 05

CAPACITY PLANNING
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CAPACITY PLANNING
Capacity is the upper limit or ceiling on the
load that an operating unit can handle.
What kind of capacity is needed?
Depends on the product or the service
management intends to produce or provide.

How much capacity is needed?

When the capacity is needed?
Forecasting process helps us to find out how
much is needed and when it is needed.
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CAPACITY
Design Capacity: The maximum output rate or
service capacity an operation, process or facility is
designed for.
Design capacity is the maximum rate of output achieved
under ideal conditions.

Actual Capacity: Rate of output actually achieved,

cannot exceed effective capacity.
Machine breakdowns, shortages of materials, quality
problem etc.
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CAPACITY
Effective Capacity: Design capacity minus
allowances such as personal time,
maintenance and scrap.
Effective capacity is usually less than design
capacity owing to realities of changing product
mix, periodic maintenance of equipment, lunch
breaks, coffee breaks etc.

EFFICIENCY AND
UTILIZATION
Actual output

Efficiency =

Utilization =

Effective capacity
Actual output
Design capacity

Effective capacity acts as a lid on actual output.

Increasing effective capacity is the key to improve
capacity utilization correcting quality problems,
maintain good operating condition, fully trained
employees etc.
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EXAMPLE 01
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day

Efficiency =
Utilization =

Actual output
Effective capacity
Actual output
Design capacity

36 units/day
40 units/ day
36 units/day
50 units/day

= 90%

= 72%
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EXAMPLE 02
A

loan processing operation that processes

an average of 7 loans per day. The
operation has a design capacity of 10
loans and per day and effective capacity
of 8 loans per day.

1.

STEPS FOR CAPACITY

PLANNING
Estimate future
capacity requirements

2.

Evaluate existing capacity

3.

Identify alternatives

4.

Conduct financial analysis

5.

Assess key qualitative issues

6.

Select one alternative

7.

Implement alternative chosen

8.

Monitor results

ASSUMPTIONS OF COSTVOLUME ANALYSIS

1. One product is involved
2. Everything produced can be sold
3. Variable cost per unit is the same regardless of
volume
4. Fixed costs do not change with volume
5. Revenue per unit constant with volume
6. Revenue per unit exceeds variable cost per
unit
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Amount ($)

COST VOLUME ANALYSIS

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0

Q (volume in units)
10

Amount ($)

COST VOLUME ANALYSIS

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1.

COST VOLUME ANALYSIS

Total Cost (TC)(CONTD.)
= Fixed Cost (FC) + Variable Cost
(VC)

2.

Profit (P) = Q (R v) FC

3.

Quantity to generate specific profit, fhfghgfhfgh

Q = (P + FC) / (R v)

4.

QBEP = FC / (R v)
Where,
v = Variable cost per unit
R = Price per unit (Also called revenue)

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EXAMPLE 03
The owner of old fashion berry pies, Mr. Simon, is
planning a new lines of pies, which will require
leasing new equipments for a monthly payment of
$6,000. Variable costs would be $2.00 per pie, and
pies retail for $7.00 each.

How many pies must be sold in order to break even?

What would be profit or loss if 1,000 pies sold in a
month?
How many pies must be sold to realize a profit of
$4,000?
If 2,000 can be sold. And profit target is $5,000,
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what price should be charged per pie?

EXAMPLE 04
The manufacturer of Igloo ice-cream has a fixed cost of tk
80, 000 and variable cost of tk 25 per pkt of made and sold.
Selling price is tk 40 per pkt.
Find the revenue, cost and profit functions using x for number
of pkt of ice-cream.
What is the profit if 50000 pkt of ice-cream are made and sold?
What is the profit if 5000 pkt of ice-cream are made and sold?
Find the break even quantity.
At what sales volume (revenue) will break-even occur?

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