MBA 542

FALL 2020
Capacity Planning Exercise C (Abridged)

MANAGERIAL QUESTION: Given the following technical and cost data, how to design the best
production system?
Technology related information:
Machine costs are as follows:
Machine type Annualized acquisition cost ($)
A 50,000
B 80,000
C 65,000
Demand Information:
The firm does not wish to lose any sales. Product (point) forecasts and processing times on each
type are as follows:
Product Annual demand (units) Unit processing times (min)
A B C
1 55,000 2 3 2
2 65,000 3 1 1
3 25,000 2 2 1
Operations related information:

The products need to be produced in batches due to positive setup times. The relevant
information is given below.
Product Batchsize (units) Setup times (min)
A B C
1 1,000 90 90 90
2 1,000 60 70 60
3 500 90 80 60

The firm plans to have two shifts. Each shift works for 10 hours per day for 250 days in a year.

In addition to the information given above, suppose all of the following also hold:
(i) The management desires to employ a capacity cushion of 15%.
(ii) Every operating hour incurs a cost of $10 on machine type A, $11
on machine type B and $8 on machine type C.
(iii) Each machine of either type requires one worker as an operator.
The wage of worker is $8 per hour. The firm computes the
operators’ labor cost on the basis of total operational time
regardless of their planned or unplanned idle times.
(iv) The firm charges an overhead calculated at 100% of ‘direct’ labor
costs.
(v) The machines have varying process capabilities. Machines of type
A have a process capability ratio of 1.30; machines of type B have
6-sigma quality, and machines of type C have a process capability
ratio of 0.90. The firm uses the concept of Taguchi loss function to
compute its poor quality costs.
The firm computes its ‘scrapping’ costs (that is, the cost for a unit
produced slightly outside the design specs) as follows: $2 for
Product 1; $3 for Product 2; $4 for Product 3.