Practice Problems: Supplement 7, Capacity Planning

Problem 1:
The design capacity for engine repair in our company is 80 trucks/day. The effective capacity is 40
engines/day and the actual output is 36 engines/day. Calculate the utilization and efficiency of the
operation. If the efficiency for next month is expected to be 82%, what is the expected output?
Problem 2:
Given: F fixed cost $1000
V variable cost $2 / unit

P selling price $4 / unit

Find the break-even point in $ and in units.
Problem 3:
Develop the break-even chart for Problem 2.
Problem 4:
Jacks Grocery is manufacturing a store brand item that has a variable cost of $0.75 per unit and a
selling price of $1.25 per unit. Fixed costs are $12,000. Current volume is 50,000 units. The
Grocery can substantially improve the product quality by adding a new piece of equipment at an
additional fixed cost of $5,000. Variable cost would increase to $1.00, but their volume should
increase to 70,000 units due to the higher quality product. Should the company buy the new
equipment?
Problem 5:
What are the break-even points ($ and units) for the two processes considered in Problem 4?
Problem 6:
Develop a break-even chart for Problem 4.
Problem 7:
Good News! You are going to receive $6,000 in each of the next 5 years for sale of used machinery.
A bank is willing to lend you the present value of the money in the meantime at discount of 10%
per year. How much cash do you receive now?

ANSWERS:
Problem 1:
Utilization =

Actual output
36

45%
Design capacity 80

Efficiency =

Actual output
36

90%
Effective capacity 40

Expected Output (Effective capacity) (Efficiency)

(40)(0.82) 32.8 engines/day
Problem 2:

Break-even point($) BEP($)

Break-even point( x) BEP( x)

F
1000 1000

$2, 000
V
2
0.5
11P
4
F
1000

500
P -V 4 2

Problem 3:

Problem 4:
Profit = TR TC
Option A: Stay as is:
Profit 50, 000*(1.25 .75) 12, 000 $13, 000.
Option B: Add equipment:
Profit 70, 000 *(1.25 1.00) 17, 000 $500.
Therefore the company should continue as is with the present equipment as this returns a higher
profit..
Problem 5:
Using current equipment:
BEP ($)

BEP ( x)

F
12, 000 12, 000 12, 000

$30, 000
V
0.75 1 0.60
0.40
1
1
P
1.25
F
12, 000

24, 000
P V 1.25 0.75

Using the new equipment

BEP ($)

BEP( x)

F
17, 000 17, 000 17, 000

$85, 000.
V
1.00 1 .80
0.2
1
1
P
1.25
F
17,000
17,000

68,000.
P V 125
. 100
.
0.25

Problem 6:

Problem 7:
The net present value factor for 10% and 5 years is 3.79
( 3.79 0.909 0.826 0.751 0.683 0.621)
Therefore, the present value is: 3.79 * $6,000 $22,740
The Bad News is you do have to pay back the loans!