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:
Jack’s 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?

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 ANSWERS:

Problem 1:
Actual output 36
Utilization = = = 45%
Design capacity 80

Actual output 36
Efficiency = = = 90%
Effective capacity 40

Expected Output = (Effective capacity) (Efficiency)

= (40)(0.82) = 32.8 engines/day

Problem 2:

F 1000 1000
Break-even point($) = BEP($) = = = = $2, 000
V 2 0.5
1- 1-
P 4
F 1000
Break-even point( x) = BEP( x) = = = 500
P -V 4 − 2

Problem 3:

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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:

F 12, 000 12, 000 12, 000
BEP ($) = = = = = $30, 000
V 0.75 1 − 0.60 0.40
1− 1−
P 1.25
F 12, 000
BEP ( x) = = = 24, 000
P − V 1.25 − 0.75

Using the new equipment

F 17, 000 17, 000 17, 000
BEP ($) = = = = = $85, 000.
V 1.00 1 − .80 0.2
1− 1−
P 1.25
F 17,000 17,000
BEP( x) = = = = 68,000.
P − V 125
. − 100
. 0.25

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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!