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POM, Chapter 9 9-1 Lecture Outline Lecture Outline Lecture Outline Lecture Outline Capacity Capacity Planning Capacity Decisions Managing Demand and Capacity Capacity Calculations Capacity Calculations Break Even Analysis Capacity Capacity Capacity Capacity Capacity Capacity is is the the throughput, or the number of units a facility can hold, receive, store, accommodate or produce Ti Ti di i di i h ld h ld b ttd ttd Time Time dimension dimension should should be bestated stated Capacity Capacity encompasses encompasses both both resource resource inputs inputs and and product/service product/service outputs outputs Capacity Capacity planning planning is is the the process process of of identifying identifying the the capacity capacity of of a process/system process/system so so as as to to meet meet current current and and ft ft d d d d future future demands demands Capacity Capacity planning planning means means different different things things to to individuals individuals at at different different levels levels in in the the OM OM hierarchy hierarchy

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Page 1: 2010 CAPACITY AND BEP

POM, Chapter 9

9-1

Lecture OutlineLecture OutlineLecture OutlineLecture Outline

Capacityp yCapacity PlanningCapacity DecisionsManaging Demand and CapacityCapacity CalculationsCapacity CalculationsBreak Even Analysis

CapacityCapacityCapacityCapacity

CapacityCapacity isis thethe throughput, or the number of units afacility can hold, receive, store, accommodate or produceTiTi di idi i h ldh ld bb t t dt t dTimeTime dimensiondimension shouldshould bebe statedstatedCapacityCapacity encompassesencompasses bothboth resourceresource inputsinputs andandproduct/serviceproduct/service outputsoutputsCapacityCapacity planningplanning isis thethe processprocess ofof identifyingidentifying thethecapacitycapacity ofof aa process/systemprocess/system soso asas toto meetmeet currentcurrent andandf tf t d dd dfuturefuture demandsdemandsCapacityCapacity planningplanning meansmeans differentdifferent thingsthings toto individualsindividualsatat differentdifferent levelslevels inin thethe OMOM hierarchyhierarchy

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Capacity PlanningCapacity Planning

Capacity Planning is the long term strategic decision thatestablishes a firm’s overall level of capital intensiveresources.To build new facilities, to acquire new machines &equipments, to hire, to acquire new businesses,technologies, etc.Inadequate capacity can loose customers & limit growthExcess capacity stretch up the resources and preventinvestments in other lucrative sectorsThe choice is when to increase and how much to increase

Capacity DecisionsCapacity Decisions

Capacity: Maximum capability to produce; is affected by the mixof product/services, processes involved, the choice of technology,the size of a facility, the resource allocated, and external factorsthe size of a facility, the resource allocated, and external factorsRated Capacity is theoretical output with 100% utilizationCapacity Utilization: percent of available time spent workingCapacity Efficiency: how well a machine or worker performscompared to a standard output level

Effective capacity is actual efficiency and utilizationEffective capacity is actual efficiency and utilizationEffective daily capacity = number of machines or workers x hours pershift x no. of shifts x utilization x efficiency

Capacity Load: standard hours of work assigned to a facilityCapacity Load Percent: ratio of load to capacity

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Actual production last week = 148,000 rollsActual production last week = 148,000 rolls

Bakery ExampleBakery Example

p ,p ,Effective capacity = 175,000 rollsEffective capacity = 175,000 rollsRated or Design capacity = 1,200 rolls per hourRated or Design capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 Bakery operates 7 days/week, 3 -- 8 hour shifts8 hour shifts

Rated or Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rollsRated or Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

Actual production last week = 148,000 rollsActual production last week = 148,000 rolls

Bakery ExampleBakery Example

p ,p ,Effective capacity = 175,000 rolls/weekEffective capacity = 175,000 rolls/weekDesign capacity = 1,200 rolls per hourDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 Bakery operates 7 days/week, 3 -- 8 hour shifts8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls/weekDesign capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls/week

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Actual production last week = 148,000 rollsActual production last week = 148,000 rolls

Bakery ExampleBakery Example

p ,p ,Effective capacity = 175,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 Bakery operates 7 days/week, 3 -- 8 hour shifts8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls/weekDesign capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls/week

Utilization = 148,000/201,600 = 73.4%Utilization = 148,000/201,600 = 73.4%

Actual production last week = 148,000 rollsActual production last week = 148,000 rolls

Bakery ExampleBakery Example

p ,p ,Effective capacity = 175,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 Bakery operates 7 days/week, 3 -- 8 hour shifts8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls/weekDesign capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls/week

Utilization = 148,000/201,600 = 73.4%Utilization = 148,000/201,600 = 73.4%

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Actual production last week = 148,000 rollsActual production last week = 148,000 rolls

Bakery ExampleBakery Example

p ,p ,Effective capacity = 175,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 Bakery operates 7 days/week, 3 -- 8 hour shifts8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls/weekDesign capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls/week

Utilization = 148,000/201,600 = 73.4%Utilization = 148,000/201,600 = 73.4%

Efficiency = 148,000/175,000 = 84.6%Efficiency = 148,000/175,000 = 84.6%

Actual production last week = 148,000 rollsActual production last week = 148,000 rolls

Bakery ExampleBakery Example

p ,p ,Effective capacity = 175,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 Bakery operates 7 days/week, 3 -- 8 hour shifts8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls/weekDesign capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls/week

Utilization = 148,000/201,600 = 73.4%Utilization = 148,000/201,600 = 73.4%

Efficiency = 148,000/175,000 = 84.6%Efficiency = 148,000/175,000 = 84.6%

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Actual production last week = 148,000 rollsActual production last week = 148,000 rolls

Bakery ExampleBakery Example

p ,p ,Effective capacity = 175,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 Bakery operates 7 days/week, 3 -- 8 hour shifts8 hour shiftsEfficiency = 84.6%Efficiency = 84.6%Efficiency of new line = 75%Efficiency of new line = 75%

E t d O t t (Eff ti C it )(Effi i )E t d O t t (Eff ti C it )(Effi i )Expected Output = (Effective Capacity)(Efficiency)Expected Output = (Effective Capacity)(Efficiency)

= (175,000)(.75) = 131,250 rolls/week= (175,000)(.75) = 131,250 rolls/week

Actual production last week = 148,000 rollsActual production last week = 148,000 rolls

Bakery ExampleBakery Example

p ,p ,Effective capacity = 175,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 Bakery operates 7 days/week, 3 -- 8 hour shifts8 hour shiftsEfficiency = 84.6%Efficiency = 84.6%Efficiency of new line = 75%Efficiency of new line = 75%

E t d O t t (Eff ti C it )(Effi i )E t d O t t (Eff ti C it )(Effi i )Expected Output = (Effective Capacity)(Efficiency)Expected Output = (Effective Capacity)(Efficiency)

= (175,000)(.75) = 131,250 rolls/week= (175,000)(.75) = 131,250 rolls/week

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Capacity DecisionsCapacity Decisions

Capacity increase i.e. how much to increase depends on volume and certainty of anticipated demandt t i bj ti titi iti i thstrategic objectives – purpose, competition, positioning, growth

costs of expansion and operationBest Operating Level

to avoid confusion with ‘normal’ capacity levels% of capacity utilization that minimizes average unit costsmost economic size of a facilitymost economic size of a facility

Capacity Cushion% of capacity held in reserve for unexpected occurrencesairline industry keeps negative cushion by overbooking ticketsairline industry keeps negative cushion by overbooking tickets

Best Operating Level for a HotelBest Operating Level for a Hotel

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Economies & Diseconomies of ScaleEconomies & Diseconomies of ScaleEconomies & Diseconomies of ScaleEconomies & Diseconomies of Scale

Economies of scale occur when it costs less per unit to produce or operate at high levels of output

fi d t b d l b f itfixed costs can be spread over a larger number of unitsquantity discounts are available for material purchasesoperating efficiency increases as workers gain experience production or operating costs do not increase linearly with output levels

Diseconomies of scale occur above a certain level of outputpDiseconomies of Distribution/TransportationDiseconomies of Bureaucracy/HierarchiesDiseconomies of Vulnerability

Demand exceeds capacityCurtail demand by raising prices

Managing DemandManaging Demand

Schedule longer lead timeLong term solution is to increase capacity

Capacity exceeds demandStimulate marketProduct changesProduct changes

Adjusting to seasonal demandsProduce products with complimentary demand patterns

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Managing Capacity

Capacity Decisions – Example #1Capacity Decisions – Example #1

Pizza Hut offers large pizzas for Rs 25 on Tuesdays from 5 to 9 in the evening. Three cooks are on duty during that time, the fixed cost of this four hour period is Rs. 400. The variable cost of pizza is Rs. 15.p pA. If it takes 10 minutes to prepare each pizza, worker efficiency is approx. 95% and employees get a 10 minutes break each hour, how may pizzas can they produce during its four hour special?B. Assuming all pizzas produced can be sold, is the promotion worth it?

A. Effective capacity = no. of workers x hours x utilization x efficiency p y y= 3 x 4 x (50/60) x 0.95 = 9.5 hrs = 570 minutes

Output = 570 / 10 = 57 pizzasB. BEP = 400 / 25 – 15 = 40 pizzasYes, the promotion effort is worth it.

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Capacity Decisions – Example #2Capacity Decisions – Example #2

AmyAmy getsgets homehome fromfrom classesclasses aroundaround 55 pmpm eacheach dayday andand cancan onlyonlyreasonablyreasonably workwork onon herher studiesstudies untiluntil midnightmidnight.. SheShe usuallyusually watcheswatches anan hourhourofof televisiontelevision toto relax,relax, workwork outout forfor 3030 minutes,minutes, andand takestakes 3030 minutesminutes toto eateatdinnerdinner.. SheShe hashas foundfound thatthat ifif sheshe takestakes aa 55 minuteminute breakbreak eacheach hour,hour, sheshe cancanremainremain moremore focusedfocused.. TodayToday sheshe feelsfeels 8080%% onon tasktask.. HomeworkHomework forfor thetheeveningevening includesincludes twotwo criticalcritical analysesanalyses forfor GovtGovt,, oneone thesisthesis forfor AmericanAmericanLit,Lit, andand threethree SpanishSpanish translationstranslations.. EstimatedEstimated processingprocessing timestimes areare givengivenbelowbelow.. SetupSetup timetime includesincludes timetime spentspent onlineonline gatheringgathering resourcesresources andandfindingfinding referencereference booksbooks aroundaround thethe apartmentapartment..

TASKSTASKS SETUP TIME (Minutes)SETUP TIME (Minutes) PROCESSING TIME PER TASK (Minutes)PROCESSING TIME PER TASK (Minutes)GovtGovt 1515 4040Govt.Govt. 1515 4040American LitAmerican Lit 3030 120120Spanish Trans.Spanish Trans. 1010 3030

WhatWhat isis percentpercent utilization?utilization?WhatWhat isis Amy’sAmy’s effectiveeffective capacitycapacity toto dodo workwork thisthis evening?evening?WhatWhat isis herher loadload percent?percent?HowHow wouldwould youyou suggestsuggest sheshe adjustadjust herher capacitycapacity toto completecomplete herher tasktask onon time?time?

Example #2Example #2Example #2Example #2

HoursHours availableavailable withwith AmyAmy == 1212--55 == 77 hrshrs == 77**6060 == 420420 minsmins

IdleIdle hourshours == 6060++3030++3030+(+(55**55)) == 145145 minsmins

UtilizedUtilized hourshours == 420420 --145145 == 275275 minsmins

%% UtilizationUtilization == 275275//420420 == 6565..4747%%

EffectiveEffective CapacityCapacity == 275275 ** 00..88 == 220220 minsmins

LoadLoad [[1515+(+(22**4040)])] ++ [[3030+(+(11**120120)])] ++ [[1010+(+(33**3030)])] 345345 minsminsLoadLoad == [[1515+(+(22**4040)])] ++ [[3030+(+(11**120120)])] ++ [[1010+(+(33**3030)])] == 345345 minsmins

LoadLoad %% == 345345//220220 == 156156..8282%%

OptionsOptions toto improveimprove:: raiseraise efficiencyefficiency oror sleepsleep latelate oror cutcut idleidle hrshrs....

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Capacity Decisions – Example #3Capacity Decisions – Example #3

BirenBiren isis ProfProf.. Khurana’sKhurana’s teachingteaching assistantassistant.. HeHe wouldwould likelike toto leaveleave forfor DiwaliDiwali breakbreak

tomorrow,tomorrow, butbut firstfirst hehe hashas toto gradegrade thethe midtermmidterm examsexams fromfrom fourfour sectionssections.. TheseThese

sectionssections areare newnew toto BirenBiren,, soso hehe estimatesestimates hishis gradinggrading efficiencyefficiency toto bebe 8080%%.. ProfProf..g gg g yy

KhuranaKhurana hashas estimatedestimated thethe timetime requiredrequired toto createcreate keykey andand thethe timetime toto gradegrade eacheach paperpaper

asas shownshown belowbelow.. BirenBiren anticipatesanticipates thatthat hehe willwill needneed fivefive hourshours ofof sleep,sleep, anan hourhour toto pack,pack,

anan hourhour toto getget thethe rlyrly station,station, anan hourhour toto postpost grades,grades, andand threethree twentytwenty minuteminute breaksbreaks

duringduring thethe dayday forfor mealsmeals.. CanCan BirenBiren finishfinish hishis workwork andand makemake itit toto thethe rlyrly stationstation onon

timetime inin aa 2424 hourhour day?day?

SECTIONSECTION TIME TO CREATE KEYTIME TO CREATE KEY TIME TO GRADE EACH PAPERTIME TO GRADE EACH PAPER #PAPERS#PAPERS

AA 1010 22 3535BB 1515 55 5050CC 55 11 6060DD 2020 1010 2525

Example #3Example #3Example #3Example #3

Hrs available = 24 hrs = 1440 mins

Non productive hrs = 5+1+1+1+(3*20) = 9 hrs = 540 mins

Working hrs = 24-9 = 15 hrs = 900 min

Utilization % = 15/24 = 900/1440 = 62.50%

Effective capacity in hrs = 900 * 0.8 = 720 mins

Load = [10+(2*35)] + [15+(5*50)] + [5+(1*60)] + [20+(10*25)]

= 680 mins= 680 mins

Load % = 680/720 = 94.45%

He can easily achieve the completion of the task assigned.

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Capacity Decisions – Example #4Capacity Decisions – Example #4

The Avon Bicycle Co. has scheduled the production of following bicycles this month.The Avon Bicycle Co. has scheduled the production of following bicycles this month.TYPETYPE WEEKWEEK

II IIII IIIIII IVIVAA 5050 100100 195195 150150AA 5050 100100 195195 150150BB 1515 3030 6565 4545CC 2020 4040 8080 6060

TwoTwo criticalcritical workwork centerscenters formform producingproducing thesethese bikesbikes areare weldingwelding andand assemblyassembly..WeldingWelding hashas anan efficiencyefficiency ofof 9595%% andand utilizationutilization ofof 9090%% andand AssemblyAssembly hashas ananefficiencyefficiency ofof 9090%% andand utilizationutilization ofof 9292%%.. TheThe timetime requiredrequired inin hourshours byby eacheach bikebike inintwotwo workwork centerscenters isis asas followsfollows::

TYPETYPE WELDINGWELDING ASSEMBLYASSEMBLYAA 0.200.20 0.180.18BB 0.150.15 0.150.15CC 0.070.07 0.100.10

Assume 40 hours/week for each work center. Calculate the capacity and load percent per work center Assume 40 hours/week for each work center. Calculate the capacity and load percent per work center per week.per week.

Chase Unsolved 5. Part a.Chase Unsolved 5. Part a.Chase Unsolved 5. Part a.Chase Unsolved 5. Part a.

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Part a.Part a.Part a.Part a.

Capacity of assembly line 1 Capacity of assembly line 1 = 140 units/hour X 8 hours/day X 5 days/week = 5,600 units/week.= 140 units/hour X 8 hours/day X 5 days/week = 5,600 units/week.

Capacity of drill machines Capacity of drill machines = 3 drill machines X 50 parts/hour X 8 hours/day X 5 days/week= 3 drill machines X 50 parts/hour X 8 hours/day X 5 days/week= 6,000 units/week.= 6,000 units/week.

Capacity of final assembly line Capacity of final assembly line = 160 units/hour X 8 hours/day X 5 days/week = 6,400 units/week.= 160 units/hour X 8 hours/day X 5 days/week = 6,400 units/week.y y ,y y ,

The capacity of the entire process is 5,600 units per week, with The capacity of the entire process is 5,600 units per week, with assembly line 1 limiting the overall capacity.assembly line 1 limiting the overall capacity.

Part b.Part b.Part b.Part b.

Capacity of assembly line 1 Capacity of assembly line 1 = 140 units/hour X 16 hours/day X 5 days/week = 11,200 units/week.= 140 units/hour X 16 hours/day X 5 days/week = 11,200 units/week.

Capacity of drill machines Capacity of drill machines = 4 drilling machines X 50 parts/hour X 8 hours/day X 5 days/week= 4 drilling machines X 50 parts/hour X 8 hours/day X 5 days/week= 8,000 units/week.= 8,000 units/week.

Capacity of final assembly line Capacity of final assembly line = 160 units/hour X 16 hours/day X 5 days/week = 12,800 units/week.= 160 units/hour X 16 hours/day X 5 days/week = 12,800 units/week.y y ,y y ,

The capacity of the entire process is 8,000 units per week, with The capacity of the entire process is 8,000 units per week, with drilling machines limiting the overall capacity.drilling machines limiting the overall capacity.

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Part c.Part c.Part c.Part c.

Capacity of assembly line 1 Capacity of assembly line 1 = 140 units/hour X 16 hours/day X 5 days/week = 11,200 units/week.= 140 units/hour X 16 hours/day X 5 days/week = 11,200 units/week.

Capacity of drill machines Capacity of drill machines = 5 drilling machines X 50 parts/hour X 8 hours/day X 5 days/week= 5 drilling machines X 50 parts/hour X 8 hours/day X 5 days/week= 10,000 units/week.= 10,000 units/week.

Capacity of final assembly line Capacity of final assembly line = 160 units/hour X 12 hours/day X 5 days/week = 9,600 units/week.= 160 units/hour X 12 hours/day X 5 days/week = 9,600 units/week.y y ,y y ,

The capacity of the entire process is 9,600 units per week, with final The capacity of the entire process is 9,600 units per week, with final assembly machines limiting the overall capacity.assembly machines limiting the overall capacity.

Part d.Part d.Part d.Part d.

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Part d.Part d.Part d.Part d.

Part e. Break Even AnalysisPart e. Break Even AnalysisPart e. Break Even AnalysisPart e. Break Even Analysis

Let X = the number of units that each option will produce. Let X = the number of units that each option will produce.

When the company buys the units the cost is $3 00 per unit (3X) When itWhen the company buys the units the cost is $3 00 per unit (3X) When itWhen the company buys the units, the cost is $3.00 per unit (3X). When it When the company buys the units, the cost is $3.00 per unit (3X). When it manufactures the units, they incur a fixed cost of $120,000 (4 drilling machines manufactures the units, they incur a fixed cost of $120,000 (4 drilling machines at $30,000 a piece) and a per unit cost of $1.81. Therefore, 120,000 + 1.81X is at $30,000 a piece) and a per unit cost of $1.81. Therefore, 120,000 + 1.81X is the cost of this option. Set them equal to each other and solve for X to the cost of this option. Set them equal to each other and solve for X to determine the breakeven point.determine the breakeven point.

3X = 120,000 + 1.81X3X = 120,000 + 1.81XX = 100 840 unitsX = 100 840 unitsX = 100,840 units.X = 100,840 units.

Therefore, it is better to buy the units when you produce less than 100,840, and Therefore, it is better to buy the units when you produce less than 100,840, and better to produce them when demand is greater than 100,840 units.better to produce them when demand is greater than 100,840 units.

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Break Even Point Analysis: BEP examines the cost trade-offs associated with demand / sales volume.V l L l f d ti ll d f it

Process Selection with BreakProcess Selection with Break--Even AnalysisEven Analysis

Volume: Level of production, usually expressed as no. of units produced/soldCost

Fixed costs: constant regardless of the no. of units producedVariable costs: vary with the volume of units produced

R P i t hi h it i ldRevenue: Price at which an item is soldTotal revenue: Price times volume soldProfit: Difference between total revenue and total cost

Total cost Total cost = fixed cost + total variable cost= fixed cost + total variable costTC = TC = ccff + v + v ccvv

Process Selection with BreakProcess Selection with Break--Even AnalysisEven Analysis

Total revenue =Total revenue = volume * pricevolume * priceTR = v pTR = v p

Profit Profit = total revenue = total revenue -- total costtotal costZ = TR Z = TR –– TC = v p TC = v p -- ((ccff + v + v ccvv))

TR = TCTR = TCv p = v p = ccff + v + v ccvv

v p v p –– v v ccvv = = ccff

v (p v (p -- ccvv)) = = ccff

v = v = ccff / ( p / ( p –– ccvv ))

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BreakBreak--Even Analysis: Example #1Even Analysis: Example #1

AA companycompany wantswants toto produceproduce itsits ownown rafts,rafts, thethe initialinitialinvestmentinvestment inin equipmentequipment isis estimatedestimated toto bebe RsRs.. 20002000.. LabourLabourandand materialmaterial costcost isis approxapprox.. RsRs 55 perper raftraft.. IfIf thethe raftsrafts cancan bebesoldsold atat aa priceprice ofof RsRs.. 1010 each,each, whatwhat volumevolume ofof demanddemand willwill bebenecessarynecessary toto breakbreak even?even?

Fixed costFixed cost = = ccff = Rs. 2000= Rs. 2000Variable costVariable cost = = ccvv = = Rs.Rs. 5 per raft5 per raft

PricePrice = = pp = = Rs.Rs. 10 per raft10 per raft

BreakBreak--even point iseven point is

v = = = 400 rafts= = = 400 raftsccff

p p -- ccvv

2000200010 10 -- 55

BreakBreak--Even Analysis: GraphEven Analysis: GraphBreakBreak--Even Analysis: GraphEven Analysis: Graph

Total cost line$3,000 —

$2,000 —

Total revenue line

Break-even point400 Units

$1,000 —

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Process Selection Process Selection –– Example #1.1Example #1.1Process Selection Process Selection –– Example #1.1Example #1.1

The owners of the company believe that demand for their product will farexceed the breakeven point. They are now contemplating a larger initialinvestment of Rs. 10000 for more automated equipment that would reducethe variable cost of manufacture to Rs. 2 per raft. Compare the oldmanufacturing process with the new process proposed here. For whatvolume of demand should each process be chosen?Sol’n: The point of indifference between Process A and B is:

Process A Process B2 000 + 5v = 10 000 + 2v2 000 + 5v = 10 000 + 2v2,000 + 5v = 10,000 + 2v2,000 + 5v = 10,000 + 2v

3v = 8,0003v = 8,000v = 2667 raftsv = 2667 rafts

Below 2667, choose ABelow 2667, choose AAbove 2667, choose BAbove 2667, choose B

Process Selection Process Selection –– BEP GraphBEP Graph

$ T t l t f$20,000 —

$15,000 —

$10,000 —

Total cost of process A

Total cost of process B

Example 4.2Example 4.2

| | |1000 2000 3000 Units

$5,000 —Choose

process AChoose

process B

Point of indifference = 2,667 Units

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BEP & Process Selection BEP & Process Selection -- #2#2BEP & Process Selection BEP & Process Selection -- #2#2

A singer is getting ready to cut his first CD, the cost of recordingthe CD is Rs. 50000 but the copies are Rs. 50 apiece. If the CDscan be sold at Rs 150 each how many CDs must be sold tocan be sold at Rs. 150 each, how many CDs must be sold tobreakeven? What is the breakeven point in Rupees?The singer is confident that the CDs will out-sale the breakevenpoint, so he is contemplating to cut his CD at a hi-tech andclassier (read pricier) studio. The cost to record the CD would riseto Rs. 90000. However, since the new studio works with highvolume production cost would fall to Rs 20 per unitvolume, production cost would fall to Rs. 20 per unit.What is the breakeven point for new process?Compare this process with the old one and find out what volumeof demand suits the older and the newer recording process.

BEP Example #3BEP Example #3BEP Example #3BEP Example #3

DavidDavid recentlyrecently purchasedpurchased aa chainchain ofof drydry cleanerscleaners inin aa citycity.. AlthoughAlthough thethebusinessbusiness isis makingmaking aa modestmodest profitprofit now,now, DavidDavid suspectssuspects thatthat ifif hehe investsinvests inin aanewnew presspress hehe wouldwould recognizerecognize aa substantialsubstantial increaseincrease inin profitsprofits TheThe newnew presspressnewnew press,press, hehe wouldwould recognizerecognize aa substantialsubstantial increaseincrease inin profitsprofits.. TheThe newnew presspresscosts,costs, RsRs.. 1515,,400400 toto purchasepurchase andand installinstall andand cancan presspress 4040 shirtsshirts anan hourhour..DavidDavid estimatesestimates thatthat withwith thethe newnew press,press, itit willwill costcost RsRs 00..2525 toto launderlaunder andandpresspress eacheach shirtshirt.. CustomersCustomers areare chargedcharged RsRs.. 11..1010 perper shirtshirt..HowHow manymany shirtsshirts willwill DavidDavid havehave toto presspress toto breakbreak even?even?SoSo far,far, David’sDavid’s workloadworkload hashas variedvaried fromfrom 5050 toto 200200 shirtsshirts aa dayday.. HowHow longlongwouldwould itit taketake toto breakbreak eveneven onon thethe newnew presspress atat thethe lowlow demanddemand estimate?estimate?wouldwould itit taketake toto breakbreak eveneven onon thethe newnew presspress atat thethe lowlow demanddemand estimate?estimate?AndAnd atat thethe highhigh demanddemand estimate?estimate?IfIf DavidDavid cutscuts hishis priceprice toto RsRs.. 00..9999 perper shirt,shirt, hehe expectsexpects toto bebe ableable toto stabilizestabilizehishis customercustomer basebase atat 250250 shirtsshirts perper dayday.. HowHow longlong itit taketake toto breakbreak eveneven atat thethereducedreduced priceprice ofof 00..9999?? ShouldShould DavidDavid cutcut hishis priceprice andand buybuy thethe newnew press?press?

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BEP Example #4BEP Example #4BEP Example #4BEP Example #4

TheThe schoolschool cafeteriacafeteria cancan makemake pizzapizza forfor approximatelyapproximately RsRs..

00..3030 perper sliceslice.. TheThe costcost ofof kitchenkitchen useuse andand cafeteriacafeteria staffstaff runsruns00..3030 perper sliceslice.. TheThe costcost ofof kitchenkitchen useuse andand cafeteriacafeteria staffstaff runsruns

aboutabout RsRs.. 200200 perper dayday.. TheThe PizzaPizza HutHut nearbynearby willwill deliverdeliver

wholewhole pizzaspizzas forfor RsRs.. 99 eacheach.. TheThe cafeteriacafeteria staffstaff cutscuts thethe pizzapizza

intointo eighteight piecespieces andand servesserves themthem inin thethe usualusual cafeteriacafeteria lineline..

WithWith nono cookingcooking duties,duties, thethe staffstaff cancan bebe reducedreduced toto half,half, forfor aa

fixedfixed costcost ofof RsRs.. 7575 perper dayday.. ShouldShould thethe schoolschool cafeteriacafeteria makemake

onon itsits ownown oror buybuy itsits pizzaspizzas fromfrom PizzaPizza Hut?Hut?

BEP Example #5BEP Example #5BEP Example #5BEP Example #5

AlmaAlma McCoyMcCoy hashas decideddecided toto purchasepurchase aa cellularcellular phonephone forfor herher car,car, butbut shesheisis confusedconfused aboutabout whichwhich raterate planplan toto choosechoose.. TheThe occasionaloccasional useruser planplan isisRsRs 00 5050 perper minuteminute regardlessregardless ofof howhow manymany minutesminutes ofof airtimeairtime areare usedusedRsRs.. 00..5050 perper minute,minute, regardlessregardless ofof howhow manymany minutesminutes ofof airtimeairtime areare usedused..TheThe frequentfrequent useruser planplan chargescharges aa flatflat raterate ofof RsRs 5555 perper monthmonth forfor 7070minutesminutes ofof airtimeairtime plusplus RsRs.. 00..3333 perper minuteminute forfor anyany timetime overover 7070 minutesminutes..TheThe executiveexecutive planplan chargescharges aa flatflat feefee ofof RsRs.. 7575 perper monthmonth forfor 100100 minutesminutesofof airtimeairtime plusplus RsRs.. 00..2525 perper minuteminute overover 100100 minutesminutes.. InIn thethe interestinterest ofofsimplicity,simplicity, AlmaAlma hashas decideddecided toto gogo withwith thethe occasionaloccasional useruser planplan toto startstartwithwith andand thenthen upgradeupgrade asas sheshe seessees fitfit atat aa laterlater datedatewithwith andand thenthen upgradeupgrade asas sheshe seessees fitfit atat aa laterlater datedate..

HowHow muchmuch airtimeairtime perper monthmonth wouldwould AlmaAlma needneed toto useuse beforebefore sheshe upgradesupgradesfromfrom thethe occasionaloccasional useruser planplan toto thethe frequentfrequent useruser planplan??

AtAt whatwhat usageusage raterate shouldshould sheshe switchswitch fromfrom thethe frequentfrequent useruser planplan toto thetheexecutiveexecutive planplan??

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POM, Chapter 9

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BEP Example #6BEP Example #6BEP Example #6BEP Example #6

SoftSoft keykey isis tryingtrying toto determinedetermine howhow bestbest toto produceproduce itsits newestnewestproduct,product, KK22 keyboardskeyboards.. TheThe keyboardskeyboards couldcould bebe producedproduced ininhousehouse usingusing eithereither ProcessProcess AA oror BB oror buyingbuying fromfrom aa suppliersupplierhousehouse usingusing eithereither ProcessProcess AA oror BB oror buyingbuying fromfrom aa suppliersupplier..CostCost datadata isis givengiven belowbelow.. ForFor whatwhat levelslevels ofof demanddemand shouldshouldeacheach optionoption bebe explored?explored?

FIXED COST (Rs.)FIXED COST (Rs.) VARIABLE COST (Rs./UNIT)VARIABLE COST (Rs./UNIT)

PROCESS APROCESS A 80008000 1010PROCESS A PROCESS A 8000 8000 1010PROCESS BPROCESS B 20000 20000 44SUPPLIER SUPPLIER 0 0 2020