CAPACITY PLANNING

REY ONATE JR.

BSA-2
Capacity
- Refers to an upper limit or ceiling on the load
that an operating unit can handle.

Design Capacity
- Refers to maximum output rate or service capacity
an operation process , or facility is designed for.
Effective Capacity
- Designed capacity minus allowances such as
personal time, and maintenance.

Actual output cannot exceed

effective capacity and is often less
because of machine breakdowns and
etc.
 2 Measures of System
Effectiveness

1. Efficiency
- ratio of actual output to effective capacity
2. Capacity Utilization
- ratio of actual output to design capacity
 Computing Efficiency and
Utilization
Given the ff. Information, compute the efficiency
and the utilization of the vehicle repair
department.

Design capacity- 50 trucks per day

Effective capacity- 40 trucks per day
Actual output- 36 trucks per day
 Determinants of Effective
Capacity
1. Facilities
2. Product and Service Factors
3. Process Factors
4. Human Factors
5. Policy Factors
6. Operational Factors
7. Supply Chain Factors
8. External Factors
Steps in Capacity Planning
1. Estimate future capacity requirements.
2. Evaluate existing capacity and facilities and identify
gaps.
3. Identify alternatives
4. Conduct financial analysis of each alternative
5. Assess key qualitative issues for each alternative
6. Select the alternative to pursue that will be best in long
term.
7. Implement the selected alternative
8. Monitor results
Determining Needed Capacity

Units of Capacity needed= Processing time needed

Processing time capacity per unit
Example
A department works one 8-hour shift, 250 days a year, and these
figures for usage of a machine that is currently being considered;

Product Annual Demand Standard Processing ProcessingTime

Time per Unit(hr) Needed (hr)
1 400 5.0 2000
2 300 8.0 2400
3 700 2.0 1400
Cost- Volume Analysis
- Focuses on relationships between cost, revenue
and volume of output

- Purpose is to estimate the income of an

organization under different conditions
Terms:
Fixed Cost
- remain constant regardless of volume of output
Variable Cost
- vary directly with the volume of output
Total cost
- sum of fixed cost and variable cost
Formulas:
Total cost = FC + VC

Variable cost = Q x V/unit

Total Revenue = Selling Price x Quantity sold

Profit = TR- TC or Q(R-V/unit) – FC

Quantity = Desired profit + FC

Selling Price- Variable Cost
Break Even Point
- the volume at which total cost and total revenue are equal

- QBEP = FIXED COST

- Selling Price –Variable Cost/Unit
Example
The owner of Old-Fashioned Berry Pies, S. Simon, is
contemplating adding a new line of pies, which will require
leasing new equipment for a monthly payment of 6000.
Variable cost would be 2 per pie. and pies would retail for 7
each.

a. How many pies must be sold in order to break even?

b. What would the profit (loss) be if 1000 pies are made
and sold in a month?
c. How many pies must be sold to realize a profit of
4000?
d. If 2000 can be sold, and a profit target is 5000, what
price should be charged per pie?
Example
A manager has the option of purchasing one, two, or three
machines. Fixed costs and potential volumes are as follows:
Number of Total Annual Corresponding Range of
Machines Fixed Costs Output
1 9600 0 to 300
2 15000 301 to 600
3 20000 601 to 900
Variable cost is 10 per unit, and revenue is 40 per unit.

a, Determine the break even point for each range.

Financial Analysis
1. Cash Flow
– refers to the difference between cash received
from sales and other sources and the cash outflow for
labour, materials, overhead and taxes.

2. Present Value
- express in current value the sum of all the future
cash flows of an investment proposal.
 Three most common used
methods
1. Present Value
- method summarizes the initial cost of an investment,
its estimated annual cash flows, and any expected salvage
value
2. Internal Rate of Return
- summarizes the initial cost, expected annual cash
flows, and estimated future salvage value of an investment
proposal in an equivalent interest rate.
3. Payback
- focuses on the length of time it will take for an
investment to return its original cost.
 Determining Payback Time

A new machine will cost 2000 but it will result in savings of

500 per year. What is the payback time in years?

Formula:
Paybacktime= Initial Cost
Annual Saving