2b.

You have been asked to put together a capacity plan for a critical operation at the Surefoot Sandal
Company. Your capacity measure is number of machines.Three products (men’s,womens, and children’s
sandals) are manufactured. The time standards (processing and set-up), lot sizes and demand forecasts
are given in the following table. The firm operates two 8-hour shifts,5 days per week, 50 weeks per year.
Experience shows that a capacity cushion of 5% is sufficient.

Time standards

Product Processing Set-up (hr/lot) Lot size Demand forecast

(hr/pair) (pairs/lot) (pairs/year)

Men’s sandals 0.05 0.5 240 80,000

Women’s sandals 0.10 2.2 180 60,000

Children’s sandals 0.02 3.8 360 1,20,000

3. A small firm intends to increase the capacity of a bottleneck operation by adding a new machine. Two
alternatives, A and B, have been identified, and the associated costs and revenues have been estimated.
Annual fixed costs would be $40,000 for A and $30,000 for B; variable costs per unit would be $10 for A
and $11 for B; and revenue per unit would be $15.

a. Determine each alternative’s break-even point.

b. At what volume of output would the two alternatives yield the same profit?

c. If the expected annual demand is 12,000 units, which alternative would yield the higher profit?

4. A Restaurant is equipped with a kitchen of annual capacity equivalent to 80,000 meals and dining hall
of annual capacity equivalent to 105,000 meals. Current year expected sales are equivalent to 80000
meals. Forecasted demand for the next 5 years is 90,000 meals for next year, followed by a 10,000-meal
increase in each of the succeeding years. The average meal is priced at $10 and the before tax profit
margin is 20% .

The Restaurant Owner is evaluating following two alternatives for expansion:

Alternative 1

Expand both the kitchen and dining hall now bringing their annual capacity to 130,000 meals per year.
The initial investment required would be 200,000 $ at the end of the current year (year 0).

Alternative 2

Expand only the kitchen now bringing its annual capacity up to that of the dining hall. If the sales in the
next 2 years live up to the expectations then expand both the kitchen and dining hall during the 3rd. year
to bring their annual capacity to 130000 meals. The upgraded capacity should suffice up through year 5.
The initial investment would be 80,000 $ at the end of the current year and an additional investment of
170,000 $ at the end of the 3rd. year.

Carry out a quantitative analysis and determine the preferred Alternative based on NPV at a discount rate
of 10%.