capacity planning.ppt
TRANSCRIPT
© 2008 Prentice Hall, Inc. S7 – 1
Operations ManagementSupplement 7 – Supplement 7 – Capacity PlanningCapacity Planning
PowerPoint presentation to accompany PowerPoint presentation to accompany Heizer/Render Heizer/Render Principles of Operations Management, 7ePrinciples of Operations Management, 7eOperations Management, 9e Operations Management, 9e
© 2008 Prentice Hall, Inc. S7 – 2
OutlineOutline CapacityCapacity
Design and Effective CapacityDesign and Effective Capacity Capacity and StrategyCapacity and Strategy Capacity ConsiderationsCapacity Considerations Managing DemandManaging Demand Demand and Capacity Demand and Capacity
Management in the Service Management in the Service SectorSector
© 2008 Prentice Hall, Inc. S7 – 3
Outline – ContinuedOutline – Continued
Capacity PlanningCapacity Planning Break-Even AnalysisBreak-Even Analysis
Single-Product CaseSingle-Product Case Multiproduct CaseMultiproduct Case
Applying Decision Trees to Applying Decision Trees to Capacity DecisionsCapacity Decisions
© 2008 Prentice Hall, Inc. S7 – 4
Outline – ContinuedOutline – Continued
Applying Investment Analysis to Applying Investment Analysis to Strategy-Driven InvestmentsStrategy-Driven Investments Investment, Variable Cost, and Investment, Variable Cost, and
Cash FlowCash Flow Net Present ValueNet Present Value
© 2008 Prentice Hall, Inc. S7 – 5
Learning ObjectivesLearning ObjectivesWhen you complete this supplement, When you complete this supplement, you should be able to:you should be able to:
1.1. Define capacityDefine capacity2.2. Determine design capacity, effective Determine design capacity, effective
capacity, and utilizationcapacity, and utilization3.3. Compute break-even analysisCompute break-even analysis4.4. Apply decision trees to capacity Apply decision trees to capacity
decisionsdecisions5.5. Compute net present valueCompute net present value
© 2008 Prentice Hall, Inc. S7 – 6
CapacityCapacity The throughput, or the number of The throughput, or the number of
units a facility can hold, receive, units a facility can hold, receive, store, or produce in a period of timestore, or produce in a period of time
Determines Determines fixed costsfixed costs
Determines if Determines if demand will demand will be satisfiedbe satisfied
Three time horizonsThree time horizons
© 2008 Prentice Hall, Inc. S7 – 7
Modify capacityModify capacity Use capacityUse capacity
Planning Over a Time Planning Over a Time HorizonHorizon
Intermediate-Intermediate-range range planningplanning
Subcontract Add personnelAdd equipment Build or use inventory Add shifts
Short-range Short-range planningplanning
Schedule jobsSchedule personnel Allocate machinery*
Long-range Long-range planningplanning
Add facilitiesAdd long lead time equipment *
** Limited options existLimited options existFigure S7.1Figure S7.1
© 2008 Prentice Hall, Inc. S7 – 8
Design and Effective Design and Effective CapacityCapacity
Design capacity is the maximum Design capacity is the maximum theoretical output of a systemtheoretical output of a system Normally expressed as a rateNormally expressed as a rate
Effective capacity is the capacity a Effective capacity is the capacity a firm expects to achieve given current firm expects to achieve given current operating constraintsoperating constraints Often lower than design capacityOften lower than design capacity
© 2008 Prentice Hall, Inc. S7 – 9
Utilization and EfficiencyUtilization and Efficiency
Utilization is the percent of design capacity Utilization is the percent of design capacity achievedachieved
Efficiency is the percent of effective capacity Efficiency is the percent of effective capacity achievedachieved
Utilization = Actual output/Design capacityUtilization = Actual output/Design capacity
Efficiency = Actual output/Effective capacityEfficiency = Actual output/Effective capacity
© 2008 Prentice Hall, Inc. S7 – 10
Bakery ExampleBakery Example
Actual production last week = Actual production last week = 148,000148,000 rolls rollsEffective capacity = Effective capacity = 175,000175,000 rolls rollsDesign capacity = Design capacity = 1,2001,200 rolls per hour rolls per hourBakery operates Bakery operates 77 days/week, days/week, 3 -3 - 88 hour shifts hour shifts
Design capacity Design capacity = (7 x 3 x 8) x (1,200) = 201,600= (7 x 3 x 8) x (1,200) = 201,600 rolls rolls
© 2008 Prentice Hall, Inc. S7 – 11
Bakery ExampleBakery Example
Actual production last week = Actual production last week = 148,000148,000 rolls rollsEffective capacity = Effective capacity = 175,000175,000 rolls rollsDesign capacity = Design capacity = 1,2001,200 rolls per hour rolls per hourBakery operates Bakery operates 77 days/week, days/week, 3 -3 - 88 hour shifts hour shifts
Design capacity Design capacity = (7 x 3 x 8) x (1,200) = 201,600= (7 x 3 x 8) x (1,200) = 201,600 rolls rolls
© 2008 Prentice Hall, Inc. S7 – 12
Bakery ExampleBakery Example
Actual production last week = Actual production last week = 148,000148,000 rolls rollsEffective capacity = Effective capacity = 175,000175,000 rolls rollsDesign capacity = Design capacity = 1,2001,200 rolls per hour rolls per hourBakery operates Bakery operates 77 days/week, days/week, 3 -3 - 88 hour shifts hour shifts
Design capacity Design capacity = (7 x 3 x 8) x (1,200) = 201,600= (7 x 3 x 8) x (1,200) = 201,600 rolls rolls
Utilization Utilization = 148,000/201,600 = 73.4%= 148,000/201,600 = 73.4%
© 2008 Prentice Hall, Inc. S7 – 13
Bakery ExampleBakery Example
Actual production last week = Actual production last week = 148,000148,000 rolls rollsEffective capacity = Effective capacity = 175,000175,000 rolls rollsDesign capacity = Design capacity = 1,2001,200 rolls per hour rolls per hourBakery operates Bakery operates 77 days/week, days/week, 3 -3 - 88 hour shifts hour shifts
Design capacity Design capacity = (7 x 3 x 8) x (1,200) = 201,600= (7 x 3 x 8) x (1,200) = 201,600 rolls rolls
Utilization Utilization = 148,000/201,600 = 73.4%= 148,000/201,600 = 73.4%
© 2008 Prentice Hall, Inc. S7 – 14
Bakery ExampleBakery Example
Actual production last week = Actual production last week = 148,000148,000 rolls rollsEffective capacity = Effective capacity = 175,000175,000 rolls rollsDesign capacity = Design capacity = 1,2001,200 rolls per hour rolls per hourBakery operates Bakery operates 77 days/week, days/week, 3 -3 - 88 hour shifts hour shifts
Design capacity Design capacity = (7 x 3 x 8) x (1,200) = 201,600= (7 x 3 x 8) x (1,200) = 201,600 rolls rolls
Utilization Utilization = 148,000/201,600 = 73.4%= 148,000/201,600 = 73.4%
Efficiency Efficiency = 148,000/175,000 = 84.6%= 148,000/175,000 = 84.6%
© 2008 Prentice Hall, Inc. S7 – 15
Bakery ExampleBakery Example
Actual production last week = Actual production last week = 148,000148,000 rolls rollsEffective capacity = Effective capacity = 175,000175,000 rolls rollsDesign capacity = Design capacity = 1,2001,200 rolls per hour rolls per hourBakery operates Bakery operates 77 days/week, days/week, 3 -3 - 88 hour shifts hour shifts
Design capacity Design capacity = (7 x 3 x 8) x (1,200) = 201,600= (7 x 3 x 8) x (1,200) = 201,600 rolls rolls
Utilization Utilization = 148,000/201,600 = 73.4%= 148,000/201,600 = 73.4%
Efficiency Efficiency = 148,000/175,000 = 84.6%= 148,000/175,000 = 84.6%
© 2008 Prentice Hall, Inc. S7 – 16
Bakery ExampleBakery Example
Actual production last week = Actual production last week = 148,000148,000 rolls rollsEffective capacity = Effective capacity = 175,000175,000 rolls rollsDesign capacity = Design capacity = 1,2001,200 rolls per hour rolls per hourBakery operates Bakery operates 77 days/week, days/week, 3 -3 - 88 hour shifts hour shiftsEfficiency Efficiency = 84.6%= 84.6%Efficiency of new line Efficiency of new line = 75%= 75%
Expected Output = Expected Output = ((Effective CapacityEffective Capacity)()(EfficiencyEfficiency))
= (175,000)(.75) = 131,250= (175,000)(.75) = 131,250 rolls rolls
© 2008 Prentice Hall, Inc. S7 – 17
Bakery ExampleBakery Example
Actual production last week = Actual production last week = 148,000148,000 rolls rollsEffective capacity = Effective capacity = 175,000175,000 rolls rollsDesign capacity = Design capacity = 1,2001,200 rolls per hour rolls per hourBakery operates Bakery operates 77 days/week, days/week, 3 -3 - 88 hour shifts hour shiftsEfficiency Efficiency = 84.6%= 84.6%Efficiency of new line Efficiency of new line = 75%= 75%
Expected Output = Expected Output = ((Effective CapacityEffective Capacity)()(EfficiencyEfficiency))
= (175,000)(.75) = 131,250= (175,000)(.75) = 131,250 rolls rolls
© 2008 Prentice Hall, Inc. S7 – 18
Capacity and StrategyCapacity and Strategy
Capacity decisions impact all 10 Capacity decisions impact all 10 decisions of operations decisions of operations management as well as other management as well as other functional areas of the organizationfunctional areas of the organization
Capacity decisions must be Capacity decisions must be integrated into the organization’s integrated into the organization’s mission and strategymission and strategy
© 2008 Prentice Hall, Inc. S7 – 19
Capacity ConsiderationsCapacity Considerations
Forecast demand accuratelyForecast demand accurately Understand the technology and Understand the technology and
capacity incrementscapacity increments Find the optimum Find the optimum
operating level operating level (volume)(volume)
Build for changeBuild for change
© 2008 Prentice Hall, Inc. S7 – 20
Economies and Economies and Diseconomies of ScaleDiseconomies of Scale
Economies Economies of scaleof scale
Diseconomies Diseconomies of scaleof scale
25 - room 25 - room roadside motelroadside motel 50 - room 50 - room
roadside motelroadside motel
75 - room 75 - room roadside motelroadside motel
Number of RoomsNumber of Rooms2525 5050 7575
Ave
rage
uni
t cos
tA
vera
ge u
nit c
ost
(dol
lars
per
room
per
nig
ht)
(dol
lars
per
room
per
nig
ht)
Figure S7.2Figure S7.2
© 2008 Prentice Hall, Inc. S7 – 21
Build In FlexibilityBuild In Flexibility
100% 100% –
80% 80% –
60% 60% –
40% 40% –
20% 20% –
0 0 –
Nis
san
Chr
ysle
r
Hon
da
GM
Toyo
ta
Ford
Percent of North American Vehicles Percent of North American Vehicles Made on Flexible Assembly LinesMade on Flexible Assembly Lines
Figure S7.3Figure S7.3
© 2008 Prentice Hall, Inc. S7 – 22
Managing DemandManaging Demand Demand exceeds capacityDemand exceeds capacity
Curtail demand by raising prices, Curtail demand by raising prices, scheduling longer lead timescheduling longer lead time
Long term solution is to increase capacityLong term solution is to increase capacity Capacity exceeds demandCapacity exceeds demand
Stimulate marketStimulate market Product changesProduct changes
Adjusting to seasonal demandsAdjusting to seasonal demands Produce products with complementary Produce products with complementary
demand patternsdemand patterns
© 2008 Prentice Hall, Inc. S7 – 23
Complementary Demand Complementary Demand PatternsPatterns
4,000 4,000 –
3,000 3,000 –
2,000 2,000 –
1,000 1,000 –
J F M A M J J A S O N D J F M A M J J A S O N D JJ F M A M J J A S O N D J F M A M J J A S O N D J
Sale
s in
uni
tsSa
les
in u
nits
Time (months)Time (months)
Jet ski Jet ski engine engine salessales
Figure S7.3Figure S7.3
© 2008 Prentice Hall, Inc. S7 – 24
Complementary Demand Complementary Demand PatternsPatterns
4,000 4,000 –
3,000 3,000 –
2,000 2,000 –
1,000 1,000 –
J F M A M J J A S O N D J F M A M J J A S O N D JJ F M A M J J A S O N D J F M A M J J A S O N D J
Sale
s in
uni
tsSa
les
in u
nits
Time (months)Time (months)
Snowmobile Snowmobile motor salesmotor sales
Jet ski Jet ski engine engine salessales
Figure S7.3Figure S7.3
© 2008 Prentice Hall, Inc. S7 – 25
Complementary Demand Complementary Demand PatternsPatterns
4,000 4,000 –
3,000 3,000 –
2,000 2,000 –
1,000 1,000 –
J F M A M J J A S O N D J F M A M J J A S O N D JJ F M A M J J A S O N D J F M A M J J A S O N D J
Sale
s in
uni
tsSa
les
in u
nits
Time (months)Time (months)
Combining both Combining both demand patterns demand patterns reduces the reduces the variationvariation
Snowmobile Snowmobile motor salesmotor sales
Jet ski Jet ski engine engine salessales
Figure S7.3Figure S7.3
© 2008 Prentice Hall, Inc. S7 – 26
Tactics for Matching Tactics for Matching Capacity to DemandCapacity to Demand
1.1. Making staffing changesMaking staffing changes2.2. Adjusting equipmentAdjusting equipment
Purchasing additional machineryPurchasing additional machinery Selling or leasing out existing equipmentSelling or leasing out existing equipment
3.3. Improving processes to increase throughputImproving processes to increase throughput4.4. Redesigning products to facilitate more Redesigning products to facilitate more
throughputthroughput5.5. Adding process flexibility to meet changing Adding process flexibility to meet changing
product preferencesproduct preferences6.6. Closing facilitiesClosing facilities
© 2008 Prentice Hall, Inc. S7 – 27
Demand and Capacity Demand and Capacity Management in the Service SectorManagement in the Service Sector
Demand managementDemand management Appointment, reservations, FCFS ruleAppointment, reservations, FCFS rule
Capacity Capacity managementmanagement Full time, Full time,
temporary, temporary, part-time part-time staffstaff
© 2008 Prentice Hall, Inc. S7 – 28
Approaches to Capacity Approaches to Capacity ExpansionExpansion
(a)(a) Leading demand with Leading demand with incremental expansionincremental expansion
Dem
and
Dem
and
Expected Expected demanddemand
New New capacitycapacity
(b)(b) Leading demand with Leading demand with one-step expansionone-step expansion
Dem
and
Dem
and
New New capacitycapacity
Expected Expected demanddemand
(d)(d) Attempts to have an average Attempts to have an average capacity with incremental capacity with incremental expansionexpansion
Dem
and
Dem
and New New
capacitycapacity Expected Expected demanddemand
(c)(c) Capacity lags demand with Capacity lags demand with incremental expansionincremental expansion
Dem
and
Dem
and
New New capacitycapacity
Expected Expected demanddemand
Figure S7.5Figure S7.5
© 2008 Prentice Hall, Inc. S7 – 29
Approaches to Capacity Approaches to Capacity ExpansionExpansion
(a)(a) Leading demand with incremental Leading demand with incremental expansionexpansion
Expected Expected demanddemand
Figure S7.5Figure S7.5
New New capacitycapacity
Dem
and
Dem
and
Time (years)Time (years)11 22 33
© 2008 Prentice Hall, Inc. S7 – 30
Approaches to Capacity Approaches to Capacity ExpansionExpansion
(b)(b) Leading demand with one-step Leading demand with one-step expansionexpansion
New New capacitycapacity
Expected Expected demanddemand
Figure S7.5Figure S7.5
Dem
and
Dem
and
Time (years)Time (years)11 22 33
© 2008 Prentice Hall, Inc. S7 – 31
Approaches to Capacity Approaches to Capacity ExpansionExpansion
(c)(c) Capacity lags demand with incremental Capacity lags demand with incremental expansionexpansion
Expected Expected demanddemand
Figure S7.5Figure S7.5
Dem
and
Dem
and
Time (years)Time (years)11 22 33
New New capacitycapacity
© 2008 Prentice Hall, Inc. S7 – 32
Approaches to Capacity Approaches to Capacity ExpansionExpansion
(d)(d) Attempts to have an average capacity Attempts to have an average capacity with incremental expansionwith incremental expansion
Expected Expected demanddemand
Figure S7.5Figure S7.5
New New capacitycapacity
Dem
and
Dem
and
Time (years)Time (years)11 22 33
© 2008 Prentice Hall, Inc. S7 – 33
Break-Even AnalysisBreak-Even Analysis
Technique for evaluating process Technique for evaluating process and equipment alternativesand equipment alternatives
Objective is to find the point in Objective is to find the point in dollars and units at which cost dollars and units at which cost equals revenueequals revenue
Requires estimation of fixed costs, Requires estimation of fixed costs, variable costs, and revenuevariable costs, and revenue
© 2008 Prentice Hall, Inc. S7 – 34
Break-Even AnalysisBreak-Even Analysis Fixed costs are costs that continue Fixed costs are costs that continue
even if no units are producedeven if no units are produced Depreciation, taxes, debt, mortgage Depreciation, taxes, debt, mortgage
paymentspayments Variable costs are costs that vary Variable costs are costs that vary
with the volume of units producedwith the volume of units produced Labor, materials, portion of utilitiesLabor, materials, portion of utilities Contribution is the difference between Contribution is the difference between
selling price and variable costselling price and variable cost
© 2008 Prentice Hall, Inc. S7 – 35
Break-Even AnalysisBreak-Even Analysis
Costs and revenue are linear Costs and revenue are linear functionsfunctions Generally not the case in the real Generally not the case in the real
worldworld We actually know these costsWe actually know these costs
Very difficult to accomplishVery difficult to accomplish There is no time value of moneyThere is no time value of money
AssumptionsAssumptions
© 2008 Prentice Hall, Inc. S7 – 36
Profit corrid
or
Loss
corridor
Break-Even AnalysisBreak-Even AnalysisTotal revenue lineTotal revenue line
Total cost lineTotal cost line
Variable costVariable cost
Fixed costFixed cost
Break-even pointBreak-even pointTotal cost = Total revenueTotal cost = Total revenue
–
900 900 –
800 800 –
700 700 –
600 600 –
500 500 –
400 400 –
300 300 –
200 200 –
100 100 –
–| | | | | | | | | | | |
00 100100 200200 300300 400400 500500 600600 700700 800800 900900 10001000 11001100
Cos
t in
dolla
rsC
ost i
n do
llars
Volume (units per period)Volume (units per period)Figure S7.6Figure S7.6
© 2008 Prentice Hall, Inc. S7 – 37
Break-Even AnalysisBreak-Even AnalysisBEPBEPxx == break-even break-even point in unitspoint in unitsBEPBEP$$ == break-even break-even point in dollarspoint in dollarsPP == price per price per unit (after all unit (after all discounts)discounts)
xx == number of units number of units producedproducedTRTR== total revenue = Pxtotal revenue = PxFF == fixed costsfixed costsVV == variable cost per unitvariable cost per unitTCTC== total costs = F + Vxtotal costs = F + Vx
TR = TCTR = TCoror
Px = F + VxPx = F + Vx
Break-even point Break-even point occurs whenoccurs when
BEPBEPxx = =FF
P - VP - V
© 2008 Prentice Hall, Inc. S7 – 38
Break-Even AnalysisBreak-Even AnalysisBEPBEPxx == break-even break-even point in unitspoint in unitsBEPBEP$$ == break-even break-even point in dollarspoint in dollarsPP == price per price per unit (after all unit (after all discounts)discounts)
xx == number of units number of units producedproducedTRTR== total revenue = Pxtotal revenue = PxFF == fixed costsfixed costsVV == variable cost per unitvariable cost per unitTCTC== total costs = F + Vxtotal costs = F + Vx
BEPBEP$$ = BEP= BEPx x PP
= P= P
==
= =
FF((P - VP - V))/P/P
FFP - VP - V
FF1 -1 - V/P V/P
ProfitProfit = TR - TC= TR - TC= Px - = Px - ((F + VxF + Vx))= Px - F - Vx= Px - F - Vx= = ((P - VP - V))x - Fx - F
© 2008 Prentice Hall, Inc. S7 – 39
Break-Even ExampleBreak-Even Example
Fixed costs Fixed costs = $10,000= $10,000 Material Material = $.75= $.75/unit/unitDirect labor Direct labor = $1.50= $1.50/unit/unit Selling price Selling price = $4.00= $4.00 per unit per unit
BEPBEP$$ = == =FF1 - (1 - (V/PV/P))
$10,000$10,0001 - [(1.50 + .75)/(4.00)]1 - [(1.50 + .75)/(4.00)]
© 2008 Prentice Hall, Inc. S7 – 40
Break-Even ExampleBreak-Even Example
Fixed costs Fixed costs = $10,000= $10,000 Material Material = $.75= $.75/unit/unitDirect labor Direct labor = $1.50= $1.50/unit/unit Selling price Selling price = $4.00= $4.00 per unit per unit
BEPBEP$$ = == =FF1 - (1 - (V/PV/P))
$10,000$10,0001 - [(1.50 + .75)/(4.00)]1 - [(1.50 + .75)/(4.00)]
= = $22,857.14= = $22,857.14$10,000$10,000.4375.4375
BEPBEPxx = = = 5,714= = = 5,714FFP - VP - V
$10,000$10,0004.00 - (1.50 + .75)4.00 - (1.50 + .75)
© 2008 Prentice Hall, Inc. S7 – 41
Break-Even ExampleBreak-Even Example
50,000 50,000 –
40,000 40,000 –
30,000 30,000 –
20,000 20,000 –
10,000 10,000 –
–| | | | | |00 2,0002,000 4,0004,000 6,0006,000 8,0008,000 10,00010,000
Dol
lars
Dol
lars
UnitsUnits
Fixed costsFixed costs
Total Total costscosts
RevenueRevenue
Break-even Break-even pointpoint
© 2008 Prentice Hall, Inc. S7 – 42
Break-Even ExampleBreak-Even Example
BEPBEP$$ ==FF
∑∑ 1 - x (1 - x (WWii))VVii
PPii
Multiproduct CaseMultiproduct Case
wherewhere VV = variable cost per unit= variable cost per unitPP = price per unit= price per unitFF = fixed costs= fixed costs
WW = percent each product is of total dollar sales= percent each product is of total dollar salesii = each product= each product
© 2008 Prentice Hall, Inc. S7 – 43
Multiproduct ExampleMultiproduct Example
Annual ForecastedAnnual ForecastedItemItem PricePrice CostCost Sales UnitsSales UnitsSandwichSandwich $2.95$2.95 $1.25$1.25 7,0007,000Soft drinkSoft drink .80.80 .30.30 7,0007,000Baked potatoBaked potato 1.551.55 .47.47 5,0005,000TeaTea .75.75 .25.25 5,0005,000Salad barSalad bar 2.852.85 1.001.00 3,0003,000
Fixed costs Fixed costs = $3,500= $3,500 per month per month
© 2008 Prentice Hall, Inc. S7 – 44
Multiproduct ExampleMultiproduct Example
Annual ForecastedAnnual ForecastedItemItem PricePrice CostCost Sales UnitsSales UnitsSandwichSandwich $2.95$2.95 $1.25$1.25 7,0007,000Soft drinkSoft drink .80.80 .30.30 7,0007,000Baked potatoBaked potato 1.551.55 .47.47 5,0005,000TeaTea .75.75 .25.25 5,0005,000Salad barSalad bar 2.852.85 1.001.00 3,0003,000
Sandwich $2.95 $1.25 .42 .58 $20,650 .446 .259Soft drink .80 .30 .38 .62 5,600 .121 .075Baked 1.55 .47 .30 .70 7,750 .167 .117 potatoTea .75 .25 .33 .67 3,750 .081 .054Salad bar 2.85 1.00 .35 .65 8,550 .185 .120
$46,300 1.000 .625
Annual WeightedSelling Variable Forecasted % of Contribution
Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $ Sales (col 5 x col 7)
Fixed costs Fixed costs = $3,500= $3,500 per month per month
© 2008 Prentice Hall, Inc. S7 – 45
Multiproduct ExampleMultiproduct Example
Annual ForecastedAnnual ForecastedItemItem PricePrice CostCost Sales UnitsSales UnitsSandwichSandwich $2.95$2.95 $1.25$1.25 7,0007,000Soft drinkSoft drink .80.80 .30.30 7,0007,000Baked potatoBaked potato 1.551.55 .47.47 5,0005,000TeaTea .75.75 .25.25 5,0005,000Salad barSalad bar 2.852.85 1.001.00 3,0003,000
Fixed costs Fixed costs = $3,500= $3,500 per month per month
Sandwich $2.95 $1.25 .42 .58 $20,650 .446 .259Soft drink .80 .30 .38 .62 5,600 .121 .075Baked 1.55 .47 .30 .70 7,750 .167 .117 potatoTea .75 .25 .33 .67 3,750 .081 .054Salad bar 2.85 1.00 .35 .65 8,550 .185 .120
$46,300 1.000 .625
Annual WeightedSelling Variable Forecasted % of Contribution
Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $ Sales (col 5 x col 7)
BEP$ =F
∑ 1 - x (Wi)Vi
Pi
= = $67,200$3,500 x 12.625
Daily sales = = $215.38$67,200
312 days
.446 x $215.38$2.95 = 32.6 33
sandwichesper day
© 2008 Prentice Hall, Inc. S7 – 46
Decision Trees and Decision Trees and Capacity DecisionCapacity Decision
-$90,000-$90,000Market unfavorable (.6)Market unfavorable (.6)
Market favorable (.4)Market favorable (.4)$100,000$100,000
Large plant
Large plant
Market favorable (.4)Market favorable (.4)
Market unfavorable (.6)Market unfavorable (.6)
$60,000$60,000
-$10,000-$10,000
Medium plantMedium plant
Market favorable (.4)Market favorable (.4)
Market unfavorable (.6)Market unfavorable (.6)
$40,000$40,000
-$5,000-$5,000
Small plant
Small plant
$0$0
Do nothing
Do nothing
© 2008 Prentice Hall, Inc. S7 – 47
Decision Trees and Decision Trees and Capacity DecisionCapacity Decision
-$90,000-$90,000Market unfavorable (.6)Market unfavorable (.6)
Market favorable (.4)Market favorable (.4)$100,000$100,000
Large plant
Large plant
Market favorable (.4)Market favorable (.4)
Market unfavorable (.6)Market unfavorable (.6)
$60,000$60,000
-$10,000-$10,000
Medium plantMedium plant
Market favorable (.4)Market favorable (.4)
Market unfavorable (.6)Market unfavorable (.6)
$40,000$40,000
-$5,000-$5,000
Small plant
Small plant
$0$0
Do nothing
Do nothing
EMV = (.4)($100,000) + (.6)(-$90,000)
Large Plant
EMV = -$14,000
© 2008 Prentice Hall, Inc. S7 – 48
Decision Trees and Decision Trees and Capacity DecisionCapacity Decision
-$14,000
$13,000
$18,000-$90,000-$90,000Market unfavorable (.6)Market unfavorable (.6)
Market favorable (.4)Market favorable (.4)$100,000$100,000
Large plant
Large plant
Market favorable (.4)Market favorable (.4)
Market unfavorable (.6)Market unfavorable (.6)
$60,000$60,000
-$10,000-$10,000
Medium plantMedium plant
Market favorable (.4)Market favorable (.4)
Market unfavorable (.6)Market unfavorable (.6)
$40,000$40,000
-$5,000-$5,000
Small plant
Small plant
$0$0
Do nothing
Do nothing
© 2008 Prentice Hall, Inc. S7 – 49
Strategy-Driven InvestmentStrategy-Driven Investment
Operations may be responsible Operations may be responsible for return-on-investment (ROI)for return-on-investment (ROI)
Analyzing capacity alternatives Analyzing capacity alternatives should include capital should include capital investment, variable cost, cash investment, variable cost, cash flows, and net present valueflows, and net present value
© 2008 Prentice Hall, Inc. S7 – 50
Net Present Value (NPV)Net Present Value (NPV)
wherewhere FF = future value= future valuePP = present value= present valueii = interest rate= interest rate
NN = number of years= number of years
P =P = FF(1 +(1 + i i))NN
© 2008 Prentice Hall, Inc. S7 – 51
Net Present Value (NPV)Net Present Value (NPV)
wherewhere FF = future value= future valuePP = present value= present valueii = interest rate= interest rate
NN = number of years= number of years
P =P = FF(1 +(1 + i i))NN
While this works fine, it is
cumbersome for larger values of N
© 2008 Prentice Hall, Inc. S7 – 52
NPV Using FactorsNPV Using Factors
P = = FXP = = FXFF(1 +(1 + i i))NN
wherewhere XX == a factor a factor from Table S7.1 defined as from Table S7.1 defined as = 1/(1 += 1/(1 + i i))NN and F = future and F = future valuevalue
YearYear 5%5% 6%6% 7%7% …… 10%10%11 .952.952 .943.943 .935.935 .909.90922 .907.907 .890.890 .873.873 .826.82633 .864.864 .840.840 .816.816 .751.75144 .823.823 .792.792 .763.763 .683.68355 .784.784 .747.747 .713.713 .621.621
Portion of Portion of Table S7.1Table S7.1
© 2008 Prentice Hall, Inc. S7 – 53
Present Value of an AnnuityPresent Value of an AnnuityAn annuity is an investment which An annuity is an investment which generates uniform equal paymentsgenerates uniform equal payments
S = RXS = RX
wherewhere XX == factor from Table factor from Table S7.2S7.2SS == present value of a present value of a series of uniform annual series of uniform annual receiptsreceiptsRR == receipts that are receipts that are received every year of the life of received every year of the life of the investmentthe investment
© 2008 Prentice Hall, Inc. S7 – 54
Present Value of an AnnuityPresent Value of an AnnuityPortion of Table S7.2Portion of Table S7.2
YearYear 5%5% 6%6% 7%7% …… 10%10%11 .952.952 .943.943 .935.935 .909.90922 1.8591.859 1.8331.833 1.8081.808 1.7361.73633 2.7232.723 2.6762.676 2.6242.624 2.4872.48744 4.3294.329 3.4653.465 3.3873.387 3.1703.17055 5.0765.076 4.2124.212 4.1004.100 3.7913.791
© 2008 Prentice Hall, Inc. S7 – 55
Present Value of an AnnuityPresent Value of an Annuity
$7,000 $7,000 in receipts per for in receipts per for 55 years yearsInterest rate Interest rate = 6%= 6%
From Table S7.2From Table S7.2X X = 4.212= 4.212
S = RXS = RXS = S = $7,000(4.212) = $29,484$7,000(4.212) = $29,484
© 2008 Prentice Hall, Inc. S7 – 56
Present Value With Different Present Value With Different Future ReceiptsFuture Receipts
Investment A’s Investment A’s Cash FlowCash Flow
Investment B’s Investment B’s Cash FlowCash Flow YearYear Present Value Present Value
Factor at 8%Factor at 8%$10,000$10,000 $9,000$9,000 11 .926.926
9,0009,000 9,0009,000 22 .857.8578,0008,000 9,0009,000 33 .794.7947,0007,000 9,0009,000 44 .735.735
© 2008 Prentice Hall, Inc. S7 – 57
Present Value With Different Present Value With Different Future ReceiptsFuture Receipts
YearYear Investment A’sInvestment A’sPresent ValuesPresent Values
Investment B’sInvestment B’sPresent ValuesPresent Values
11 $9,260 =$9,260 = (.926)($10,000)(.926)($10,000) $8,334 =$8,334 = (.926)($9,000)(.926)($9,000)
22 7,713 =7,713 = (.857)($9,000)(.857)($9,000) 7,713 =7,713 = (.857)($9,000)(.857)($9,000)
33 6,352 =6,352 = (.794)($8,000)(.794)($8,000) 7,146 =7,146 = (.794)($9,000)(.794)($9,000)
44 5,145 =5,145 = (.735)($7,000)(.735)($7,000) 6,615 =6,615 = (.735)($9,000)(.735)($9,000)
TotalsTotals $28,470$28,470 $29,808$29,808
Minus initial Minus initial investmentinvestment -25,000-25,000 -26,000-26,000
Net present Net present valuevalue $3,470$3,470 $3,808$3,808