Louisiana State University

ISDS 3115

Chapter7S

True/False

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

 

 

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

 

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

 

4. Expected output is sometimes referred to as rated capacity.

 

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

 

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

 

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

 

8. Building an additional warehouse is an incremental expansion, not a one-step expansion.

 

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

 

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

 

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

 

12. A decision tree indicates at what quantity profit changes from negative to positive.

 

13. A decision tree for analyzing capacity would have future demands or market favorability as the decision alternatives.

 

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

 

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

$10,000.

16. What is sometimes referred to as rated capacity?

1. efficiency
2. utilization
3. effective capacity
4. expected output
5. design capacity

 

17. Effective capacity is the
    1. maximum output of a system in a given period
    2. capacity a firm expects to achieve given the current operating constraints
    3. average output that can be achieved under ideal conditions
    4. minimum usable capacity of a particular facility
    5. sum of all of the organization's inputs

 

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

1. inexpensive rates for weekend phone calls
2. appointments
3. reservations
4. first-come, first-served
5. none of the above

 

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

what is the efficiency of the system?

1. 1. 1350 students
   2. 1710 students

c. 75%

d. 87.7%

e. 90%

 

20. 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

 

21. The staff training center 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 center 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            .

1. 1. 79.2 percent; 90.5 percent
   2. 90.5 percent; 79.2 percent
   3. 87.5 percent; 950 employees
   4. 950 employees; 1050 employees
   5. 110.5 percent; 114.3 percent

 

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

1. appointments
2. reservations
3. changes in staffing levels
4. first-come, first served service rule
5. “early bird” specials in restaurants

c

 

23. If demand exceeds capacity at a new facility, an organization can use which of the following to move demand to an existing facility?
    1. aggressive marketing
    2. lower prices at all facilities
    3. build a facility of the correct size
    4. add a complementary product
    5. reduce lead times

 

24. Adding a complementary product to what is currently being produced is a demand management strategy used when
    1. demand exceeds capacity
    2. capacity exceeds demand for a product which has stable demand
    3. the existing product has seasonal or cyclical demand
    4. price increases have failed to bring about demand management
    5. efficiency exceeds 100 percent

 

25. An organization whose capacity is on that portion of the average unit cost curve that falls as output rises
    1. has a facility that is below optimum operating level and should build a larger facility
    2. has a facility that is above optimum operating level and should build a smaller facility
    3. is suffering from diseconomies of scale
    4. has utilization higher than efficiency
    5. has efficiency higher than utilization

 

26. Of the four approaches to capacity expansion, the approach that "straddles" demand
    1. uses incremental expansion
    2. uses one-step expansion
    3. at some times leads demand, and at other times lags
    4. works best when demand is not growing but is stable
    5. Choices a and c are both correct.

 

27. Which of the following is not one of the four approaches to capacity expansion?
    1. average capacity with incremental expansion
    2. lead demand with incremental expansion
    3. lag demand with incremental expansion

1. 4. lead demand with one-step expansion
   5. lag demand with one-step expansion

 

28. Which of the following is false regarding capacity expansion?
    1. "Average" capacity sometimes leads demand, sometimes lags it.
    2. If "lagging" capacity is chosen, excess demand can be met with overtime or subcontracting.
    3. Total cost comparisons are a rather direct method of comparing capacity alternatives.
    4. Capacity may only be added in large chunks.
    5. All of the above are true.

 

29. Break-even is the number of units at which
    1. total revenue equals price times quantity
    2. total revenue equals total variable cost
    3. total revenue equals total fixed cost
    4. total profit equals total cost
    5. total revenue equals total cost

 

30. Which of the following statements regarding fixed costs is true ?
    1. Fixed costs rise by a constant amount for every added unit of volume.
    2. While fixed costs are ordinarily constant with respect to volume, they can "step" upward if volume increases result in additional fixed costs.
    3. Fixed costs are those costs associated with direct labor and materials.
    4. Fixed costs equal variable costs at the break-even point.
    5. Fixed cost is the difference between selling price and variable cost.

 

31. Which of the following costs would be incurred even if no units were produced?
    1. raw material costs
    2. direct labor costs
    3. transportation costs
    4. building rental costs
    5. purchasing costs

 

32. Basic break-even analysis typically assumes that
    1. revenues increase in direct proportion to the volume of production, while costs increase at a decreasing rate as production volume increases
    2. variable costs and revenues increase in direct proportion to the volume of production
    3. both costs and revenues are made up of fixed and variable portions
    4. 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
    5. All of the above are assumptions in the basic break-even model.

 

33. 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

1. 1. $90,000 dollars
   2. 90,000 units
   3. $15,000 dollars
   4. 15,000 units
   5. cannot be calculated from the information provided

 

34. 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?
    1. machine A
    2. machine B
    3. either machine A or machine B
    4. no purchase because neither machine yields a profit at that volume
    5. purchase both machines since they are both profitable

 

35. 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
    1. 4,000 units, with A more profitable at low volumes
    2. 4,000 dollars, with A more profitable at low volumes
    3. 4,000 units, with B more profitable at low volumes
    4. 4,000 dollars, with B more profitable at low volumes
    5. none of the above

 

36. 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?

1. 1. machine A
   2. machine B
   3. either machine A or machine B
   4. no purchase because neither machine yields a profit at that volume
   5. purchase both machines since they are both profitable

 

37. Break-even analysis can be used by a firm that produces more than one product, but
    1. the results are estimates, not exact values
    2. the firm must allocate some fixed cost to each of the products
    3. each product has its own break-even point
    4. the break-even point depends upon the proportion of sales generated by each of the products
    5. None of these statements is true.

 

38. The basic break-even model can be modified to handle more than one product. This extension of the basic model requires
    1. price and sales volume for each product
    2. price and variable cost for each product, and the percent of sales that each product represents
    3. that the firm have very low fixed costs
    4. that the ratio of variable cost to price be the same for all products
    5. sales volume for each product

 

39. 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. The weighted contribution of this product is approximately

a. 0.133

b. 0.200

c. 0.40

d. 0.667

e. $1.667

 

40. When decision trees are used to analyze capacity decisions,
    1. "do nothing" is not a possible decision alternative
    2. probabilities must be assigned to each of the decision alternatives
    3. states of nature are often demand-based, as in "market favorability"
    4. states of nature must be known with certainty
    5. fixed costs are not relevant

 

41. Net present value
    1. is gross domestic product less depreciation
    2. is sales volume less sales and excise taxes
    3. is profit after taxes
    4. ignores the time value of money
    5. is the discounted value of a series of future cash receipts

 

42. Net present value will be greater
    1. as a fixed set of cash receipts occurs later rather than earlier
    2. as the total of the cash receipts, made in same time periods, is smaller
    3. for one end-of-year receipt of $1200 than for twelve monthly receipts of $100 each
    4. for a 4% discount rate than for a 6% discount rate
    5. All of the above are true.

 

43. 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 percent, the net present value of this investment is
    1. greater than $80,000
    2. greater than $130,000
    3. less than $30,000
    4. impossible to calculate, because no interest rate is given
    5. impossible to calculate, because variable costs are not known

 

44. 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 percent, the net present value of this investment is approximately

a. $20,920

b. $26,160

c. $49,840

d. $70,920

e. $106,990