Deck 27: Capacity and Constraint Management

Question 1

Break-even analysis is a powerful analytical tool, but is useful only when the organization produces a single product.

Answer 1

False

Question 2

A useful tactic for increasing capacity is to redesign a product in order to get more throughput.

Answer 2

True

Question 3

Expected output is sometimes referred to as rated capacity.

Answer 3

True

Question 4

Break-even analysis identifies the volume at which fixed costs and revenue are equal.

Question 5

Effective capacity is the

A) maximum output of a system in a given period.
B) capacity a firm expects to achieve given the current operating constraints.
C) average output that can be achieved under ideal conditions.
D) minimum usable capacity of a particular facility.
E) sum of all of the organization's inputs.

Question 6

Changes in capacity may lead, lag, or straddle the demand.

Question 7

Substantial research has proved that the only successful method of dealing with bottlenecks is to increase the bottleneck's capacity.

Question 8

The theory of constraints is a body of knowledge that deals with anything that limits an organization's ability to achieve its goals.

Question 9

Utilization is the number of units a facility can hold, receive, store, or produce in a period of time.

Question 10

The process time of a system is always at least a long as the process cycle time.

Question 11

Design capacity is the theoretical maximum output of a system in a given period under ideal conditions.

Question 12

What is sometimes referred to as rated capacity?

A) efficiency
B) utilization
C) effective capacity
D) expected output
E) design capacity

Question 13

The net present value of $10,000 to be received in exactly three years is considerably greater than $10,000.

Question 14

Possible decision alternatives found in capacity EMV problems are future demands or market favorability.

Question 15

Fixed costs are those costs that continue even if no units are produced.

Question 16

One limitation of the net present value approach to investments is that investments with identical net present values may have very different cash flows.

Question 17

Which of the following represents an aggressive approach to demand management in the service sector when demand and capacity are not particularly well matched?

A) inexpensive rates for weekend phone calls
B) appointments
C) reservations
D) first-come, first-served
E) self-serve

Question 18

Price changes are useful for matching the level of demand to the capacity of a facility.

Question 19

Capacity decisions are based on technological concerns, not demand forecasts.

Question 20

To find the process cycle time with simultaneous processes, compute the time over all paths and choose the shortest path through the system.

Question 21

Which of the following is false regarding capacity expansion?

A) "Average" capacity sometimes leads demand, sometimes lags it.
B) If "lagging" capacity is chosen, excess demand can be met with overtime or subcontracting.
C) Total cost comparisons are a rather direct method of comparing capacity alternatives.
D) Capacity may only be added in large chunks.
E) All of the above are true.

Question 22

Christopher's Cranks uses a machine that can produce 100 cranks per hour. The firm operates 12 hours per day, five days per week. Due to regularly scheduled preventive maintenance, the firm expects the machine to be running during approximately 95% of the available time. Based on experience with other products, the firm expects to achieve an efficiency level for the cranks of 85%. What is the expected weekly output of cranks for this company?

A) 5100
B) 5700
C) 4845
D) 969
E) 6783

Question 23

The Theory of Constraints strives to reduce the effect of constraints by

A) offloading work from constrained workstations.
B) increasing constrained workstation capability.
C) changing workstation order to reduce process cycle time.
D) offloading work from constrained workstations and increasing constrained workstation capability.
E) offloading work from constrained workstations, increasing constrained workstation capability, and changing workstation order to reduce process cycle time.

Question 24

A tortilla chip workstation produces 1,000 chips in 20 seconds. Its process time is

A) )02 seconds per chip.
B) 50 chips per second.
C) 20 seconds.
D) 6000 chips per minute.
E) 60 chips per minute.

Question 25

An assembly line has 10 stations with process times of 1, 2, 3, 4, …, 10 respectively. The process time of the system is

A) 18.18% of the process cycle time.
B) 100% of the process cycle time.
C) 550% of the process cycle time.
D) 50% of the process cycle time.
E) 2% of the process cycle time.

Question 26

The Theory of Constraints was popularized by

A) Goldratt and Cox.
B) Ford.
C) Taguchi.
D) Deming.
E) Motorola and GE.

Question 27

Which of the following approach to capacity expansion "straddles" demand?

A) capacity leads demand
B) uses one-step expansion
C) at some times leads demand, and at other times lags
D) works best when demand is not growing but is stable
E) demand exceeds capacity

Question 28

An organization whose capacity is on that portion of the average unit cost curve that falls as output rises

A) has a facility that is below optimum operating level and should build a larger facility.
B) has a facility that is above optimum operating level and should build a smaller facility.
C) is suffering from diseconomies of scale.
D) has utilization higher than efficiency.
E) has efficiency higher than utilization.

Question 29

Utilization will always be lower than efficiency because

A) effective capacity is less than design capacity.
B) effective capacity is greater than design capacity.
C) effective capacity equals design capacity.
D) utilization and efficiency are equal in value.
E) utilization is normally greater than efficiency.

Question 30

The process time of a system is equivalent to the

A) process time of the bottleneck.
B) sum of all workstation times.
C) shortest workstation time.
D) mean workstation time.
E) median workstation time.

Question 31

The Academic Computing Centre has five trainers available in its computer labs to provide training sessions to students. Assume that the design capacity of the system is 1900 students per semester and that effective capacity equals 90% of design capacity. If the number of students who actually got their orientation session is 1500, what is the efficiency of the system?

A) 1350 students
B) 1710 students
C) 78.9%
D) 87.7%
E) 90%

Question 32

Consider a production line with five stations. Station 1 can produce a unit in 9 minutes. Station 2 can produce a unit in 10 minutes. Station three has two identical machines, each of which can process a unit in 12 minutes (each unit only needs to be processed on one of the two machines). Station 4 can produce a unit in 5 minutes. Station 5 can produce a unit in 8 minutes. Which station is the bottleneck station?

A) station 1
B) station 2
C) station 3
D) station 4
E) station 5

Question 33

Adding a complementary product to what is currently being produced is a demand management strategy used when

A) demand exceeds capacity.
B) capacity exceeds demand for a product which has stable demand.
C) the existing product has seasonal or cyclical demand.
D) price increases have failed to bring about demand management.
E) efficiency exceeds 100%.

Question 34

The staff training centre at a large regional hospital provides training sessions in CPR to all employees. Assume that the capacity of this training system was designed to be 1200 employees per year. Since the training centre was first put in use, the program has become more complex, so that 1050 now represents the most employees that can be trained per year. In the past year, 950 employees were trained. The efficiency of this system is approximately ________ and its utilization is approximately ________.

A) 79.2%; 90.5%
B) 90.5%; 79.2%
C) 87.5%; 950 employees
D) 950 employees; 1050 employees
E) 110.5%; 114.3%

Question 35

A work system has five stations that have process times of 5, 9, 4, 9, and 8. What is the process time of the system?

A) 4
B) 9
C) 18
D) 35
E) 48

Question 36

Which of the following is not one of the four principles of bottleneck management?

A) Release work orders to the system at the bottleneck's capacity pace.
B) Lost time at the bottleneck is lost system capacity.
C) Increasing capacity at non-bottleneck stations is a mirage.
D) Increased bottleneck capacity is increased system capacity.
E) Bottlenecks should be moved to the end of the system process.

Question 37

If capacity exceeds demand at a new facility, an organization can use which of the following to move demand?

A) aggressive marketing
B) lower prices at all facilities
C) build a facility of the correct size
D) add a complementary product
E) reduce lead times

Question 38

A high value for which of the following signals that an operations manager is excelling?

A) efficiency
B) utilization
C) effective capacity
D) net present value
E) design capacity

Question 39

A work system has five stations that have process times of 5, 9, 4, 9, and 8. What is the process cycle time of the system?

A) 4
B) 9
C) 18
D) 35
E) 48

Question 40

Which of the following represents a common way to manage capacity in the service sector?

A) appointments
B) reservations
C) changes in staffing levels
D) first-come, first served service rule
E) "early bird" specials in restaurants

Question 41

Net present value

A) is gross domestic product less depreciation.
B) is sales volume less sales and excise taxes.
C) is profit after taxes.
D) ignores the time value of money.
E) is the discounted value of a series of future cash receipts.

Question 42

Which of the following techniques is not a technique for dealing with a bottleneck?

A) Schedule throughput to match capacity of the bottleneck.
B) Increase capacity of the constraint.
C) Have cross-trained employees available to keep the constraint at full operation.
D) Develop alternate routings.
E) All are tools for dealing with bottlenecks.

Question 43

Basic break-even analysis typically assumes that

A) revenues increase in direct proportion to the volume of production, while costs increase at a decreasing rate as production volume increases.
B) variable costs and revenues increase in direct proportion to the volume of production.
C) both costs and revenues are made up of fixed and variable portions.
D) costs increase in direct proportion to the volume of production, while revenues increase at a decreasing rate as production volume increases because of the need to give quantity discounts.
E) All of the above are assumptions in the basic break-even model.

Question 44

Which of the following statements regarding fixed costs is true?

A) Fixed costs rise by a constant amount for every added unit of volume.
B) While fixed costs are ordinarily constant with respect to volume, they can "step" upward if volume increases result in additional fixed costs.
C) Fixed costs are those costs associated with direct labour and materials.
D) Fixed costs equal variable costs at the break-even point.
E) Fixed cost is the difference between selling price and variable cost.

Question 45

The three main strategies for increasing capacity are

A) leading, lag, straddle.
B) fast, normal, slow.
C) before, during, after.
D) leading, behind, mixed.
E) over, under, even.

Question 46

A common method(s) used to increase capacity with a lag strategy is/are

A) overtime and subcontractors.
B) subcontractors and new facilities.
C) new facilities and new machinery.
D) new machinery and overtime.
E) turning away customers.

Question 47

Break-even is the number of units at which

A) total revenue equals price times quantity.
B) total revenue equals total variable cost.
C) total revenue equals total fixed cost.
D) total profit equals total cost.
E) total revenue equals total cost.

Question 48

Fabricators, Inc. wants to increase capacity by adding a new machine. The fixed costs for machine A are $90,000, and its variable cost is $15 per unit. The revenue is $21 per unit. The break-even point for machine A is

A) $90,000 dollars.
B) 90,000 units.
C) $15,000 dollars.
D) 15,000 units.
E) cannot be calculated from the information provided.

Question 49

Break-even analysis can be used by a firm that produces more than one product, but

A) the results are estimates, not exact values.
B) the firm must allocate some fixed cost to each of the products.
C) each product has its own break-even point.
D) the break-even point depends upon the proportion of sales generated by each of the products.
E) the results are never accurate.

Question 50

A fabrication company wants to increase capacity by adding a new machine. The firm is considering proposals from vendor A and vendor B. The fixed costs for machine A are $90,000 and for machine B, $75,000. The variable cost for A is $15.00 per unit and for B, $18.00. The revenue generated by the units processed on these machines is $21 per unit. If the estimated output is 5000 units, which machine should be purchased?

A) machine A
B) machine B
C) either machine A or machine B
D) no purchase because neither machine yields a profit at that volume
E) purchase both machines since they are both profitable

Question 51

A capacity alternative has an initial cost of $50,000 and cash flow of $20,000 for each of the next four years. If the cost of capital is 5%, the net present value of this investment is approximately

A) $20,920.
B) $26,160.
C) $49,840.
D) $70,920.
E) $106,990.

Question 52

A capacity alternative has an initial cost of $50,000 and cash flow of $20,000 for each of the next four years. If the cost of capital is 5%, the net present value of this investment is

A) greater than $80,000.
B) greater than $130,000.
C) less than $30,000.
D) impossible to calculate, because no interest rate is given.
E) impossible to calculate, because variable costs are not known.

Question 53

A shop wants to increase capacity by adding a new machine. The firm is considering proposals from vendor A and vendor B. The fixed costs for machine A are $90,000 and for machine B, $75,000. The variable cost for A is $15.00 per unit and for B, $18.00. The revenue generated by the units processed on these machines is $22 per unit. If the estimated output is 9,000 units, which machine should be purchased?

A) machine A
B) machine B
C) either machine A or machine B
D) no purchase because neither machine yields a profit at that volume
E) purchase both machines since they are both profitable

Question 54

A product sells for $5, and has unit variable costs of $3. This product accounts for $20,000 in annual sales, out of the firm's total of $60,000. When performing multiproduct break-even analysis, the weighted contribution of this product is approximately

A) 0.133.
B) 0.200.
C) 0.40.
D) 0.667.
E) $1.667.

Question 55

Fred's Fabrication, Inc. wants to increase capacity by adding a new machine. The firm is considering proposals from vendor A and vendor B. The fixed costs for machine A are $90,000 and for machine B, $70,000. The variable cost for A is $9.00 per unit and for B, $14.00. The revenue generated by the units processed on these machines is $20 per unit. The crossover between machine A and machine B is

A) 4,000 units, with A more profitable at low volumes.
B) 4,000 dollars, with A more profitable at low volumes.
C) 4,000 units, with B more profitable at low volumes.
D) 4,000 dollars, with B more profitable at low volumes.
E) cannot be calculated from the information provided.

Question 56

The theory of constraints has its origins in

A) linear programming theory.
B) the theory of economies of scale.
C) material requirements planning.
D) the theory of finite capacity planning.
E) Goldratt and Cox's book, The Goal: A Process of Ongoing Improvement.

Question 57

Net present value will be greater

A) as a fixed set of cash receipts occurs later rather than earlier.
B) as the total of the cash receipts, made in same time periods, is smaller.
C) for one end-of-year receipt of $1200 than for twelve monthly receipts of $100 each.
D) for a 4% discount rate than for a 6% discount rate.
E) All of the above are true.

Question 58

Lag and straddle strategies for increasing capacity have what main advantage over a leading strategy?

A) They are cheaper.
B) They are more accurate.
C) They delay capital expenditure.
D) They increase demand.
E) They increase the need for capital expenditure.

Question 59

The basic break-even model can be modified to handle more than one product. This extension of the basic model requires

A) price and sales volume for each product.
B) price and variable cost for each product, and the percent of sales that each product represents.
C) that the firm have very low fixed costs.
D) that the ratio of variable cost to price be the same for all products.
E) sales volume for each product.

Question 60

Which of the following costs would be incurred even if no units were produced?

A) raw material costs
B) direct labour costs
C) transportation costs
D) building rental costs
E) purchasing costs

Question 61

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

Question 62

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.

Question 63

Define fixed costs.

Question 64

In "drum, buffer, rope," what provides the schedule, i.e. the pace of production?

A) drum
B) buffer
C) rope
D) drum, buffer, and rope combined
E) both buffer and rope

Question 65

In "drum, buffer, rope," the ________ acts like kanban signals.

Question 66

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?

Question 67

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

Question 68

Why is the capacity decision important?

Question 69

Define variable costs. What special assumption is made about variable costs in the textbook?

Question 70

Identify the tactics for matching capacity to demand.

Question 71

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

Question 72

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

Question 73

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

Question 74

Distinguish between utilization and efficiency.

Question 75

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 tonnes. But as the surviving mills have added capacity, the break-even point is now 1,000,000 tonnes. In 1999, the state's farmers produced 16,000,000 tonnes of cane, but by 2004, the crop was down to 13,000,000 tonnes. Analyse this situation with what you have learned about the capacity decision. Is the industry better off with fewer but larger mills, or not?

Question 76

________ is actual output as a percent of design capacity.

Question 77

In the service sector, scheduling customers is ________, and scheduling the workforce is ________.

Question 78

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.

Question 79

________ is actual output as a percent of effective capacity.

Question 80

________ analysis finds the point at which costs equals revenues.