Operations and Supply Chain Management The Core

STRATEGIC CAPACITY MANAGEMENT chapter 4 109
Finally, the third option of moving to the Midwest immediately has an expected value of
0.75 × 3,500,000 + 0.25 × 2,000,000 = $3,125,000.
From this, it looks like the best alternative is to stay in Chicago and lease a new building
immediately.
DISCUSSION QUESTIONS
LO4–1 1. What capacity problems are encountered when a new drug is introduced to the
market?
2. List some practical limits to economies of scale. In other words, when should a
plant stop growing?
3. What are some capacity balance problems faced by the following organizations or
facilities?
a. An airline terminal
b. A university computing lab
c. A clothing manufacturer
4. At first glance, the concepts of the focused factory and capacity flexibility may
seem to contradict each other. Do they really?
LO4–2 5. Management may choose to build up capacity in anticipation of demand or in
response to developing demand. Cite the advantages and disadvantages of both
approaches.
6. What is capacity balance? Why is it hard to achieve? What methods are used to
deal with capacity imbalances?
7. What are some reasons for a plant to maintain a capacity cushion? How about a
negative capacity cushion?
LO4–3 8. Will the use of decision tree analysis guarantee the best decision for a firm? Why
or why not? If not, why bother using it?
9. Consider the example in Exhibit 4.5. Can you think of anything else you might do
with that example that would be helpful to the ultimate decision maker?
LO4–4 10. What are some major capacity considerations in a hospital? How do they differ
from those of a factory?
11. Refer to Exhibit 4.6. Why is it that the critical zone begins at a utilization rate of
about 70 percent in a typical service operation? Draw upon your own experiences
as either a customer or a server in common service establishments.
OBJECTIVE QUESTIONS
LO4–1 1. A manufacturing shop is designed to operate most efficiently at an output of 550
units per day. In the past month, the plant averaged 490 units per day. What was
its capacity utilization rate last month?
2. A company has a factory that is designed so that it is most efficient (average unit
cost is minimized) when producing 15,000 units of output each month. However,
it has an absolute maximum output capability of 17,250 units per month, and can
produce as little as 7,000 units per month without corporate headquarters shifting
production to another plant. If the factory produces 10,925 units in October, what
is the capacity utilization rate in October for this factory?
3. Hoosier Manufacturing operates a production shop that is designed to have the
lowest unit production cost at an output rate of 100 units per hour. In the month of
July, the company operated the production line for a total of 175 hours and produced
16,900 units of output. What was its capacity utilization rate for the month?