Name of Institution

CAPACITY
PLANNING
 INTRODUCTION TO Name of Institution

CAPACITY
Capacity is the maximum amount of work
that an organization is capable of
completing in a given period.
The basic questions in capacity handling
are-
1. What kind of capacity is needed?
2. How much capacity is needed?
3. When is it needed?
 FORMULA Name of Institution

• Capacity is calculated as:-

(number of machines or workers) x (number of
shifts) x (utilization) x (efficiency)
 EFFICIENCY AND Name of Institution

UTILIZATION
Efficiency = Actual output
Effective capacity

Utilization = Actual output

Design capacity
 TERMS RELATING TO Name of Institution

CAPACITY
1. Design Capacity – maximum obtainable
output
2. Effective Capacity- capacity which a firm
expects to achieve in the current
operating constraints.
3. Actual Output- rate of output actually
achieved (cannot exceed effective
capacity)
 CAPACITY PLANNING Name of Institution

• Capacity Planning is the process of

determining the production capacity
required by an organization to meet the
changing demands for its products.
 IMPORTANCE OF Name of Institution

CAPACITY DECISIONS
• Ability to meet future demands
• Affects operating costs
• Involves long-term commitment
• Affects competitiveness
• Affects ease of management
 CLASSES OF CAPACITY Name of Institution

PLANNING
• Lead Strategy- adding capacity in
anticipation of an increase in demand.

• Lag Strategy- adding capacity only after

the organization is running at full capacity
or beyond due to increase in demand.

• Match Strategy- adding capacity in small

amounts.
 HOW TO DO CAPACITY Name of Institution

PLANNING
Three Steps to Capacity Planning-
1. Determine Service Level Requirements
- Define workloads
- Determine the unit of work
- Identify service levels for each workload
2. Analyze Current Capacity
- Measure overall resource usage
- Measure resource usage by workload
- Identify components of responses time
3. Planning for the future
- Determine future processing requirements
- Plan future system configuration
 BREAK EVEN ANALYSIS Name of Institution

• A technique for evaluating process and

equipment alternatives.

• The objective is to find the point and units

at which cost equals revenue.

• It requires estimation of fixed costs,

variable costs and revenue.
 BREAK EVEN ANALYSIS Name of Institution

• Fixed costs are costs that continue even if

no units are produced.

• Variable costs are costs that vary with the

volume of units produced.
 BREAK EVEN ANALYSIS Name of Institution

–
Total revenue line
900 –

800 –
Break-even point Total cost line
700 – Total cost = Total revenue
Cost in rupees

600 –

500 –

400 – Variable cost

300 –

200 –

100 – Fixed cost

–
| | | | | | | | | | | |
0 100 200 300 400 500 600 700 800 900 1000 1100
Figure S7.5
Volume (units per period)
 Name of Institution

BEPx = Break even point in units

BEPrs = Break even point in rupees
P = Price per unit
x = number of units produced
TR = Total Revenue
F = Fixed Costs
V = Variable Costs
TC = Total Cost
 Name of Institution

• Break Even Point occurs when TC = TR

• BEPx = F/ P – V
• BEPrs = BEPx*P
= F/P-V*P
= F/(P-V)P
= F
(1-V)/P
• Profit = TR – TC
BREAK EVEN EXAMPLE Name of Institution

Q. Fixed Costs = Rs 10,000

Direct Labor = Rs 1.50/unit
Material = Rs 0.75/unit
Selling Price = Rs 4/ unit
 Name of Institution

BEPrs = F/1- (V/P)

= 10,000/ 1- (1.50+0.75/4)
= 10,000/0.4375
= Rs 22,857
BEPx = F/ P-V
= 10,000/4-(1.50+0.75)
= 5,714
 DECISION TREE Name of Institution

Decision Trees are excellent tools for

helping you to choose between several
courses of action. They provide a highly
effective structure within which you can
lay out options and investigate the possible
outcomes of choosing those options.
 DECISION TREE Name of Institution

DIAGRAMS
• A diagrammatic technique which uses-
1. Decision points- points in time when
decisions are made, squares called nodes.
2. Decision alternatives- branches of the
tree off the decision nodes.
3. Chance events- events that could affect a
decision.
4. Outcomes- each possible alternative
listed.
 DECISION TREE Name of Institution

Decision trees are developed by-

1. Drawing from left to right.
2. Use squares to indicate decision points.
3. Use circles to indicate chance events.
4. Write each alternative outcome in the
right margin.
 EXAMPLE OF DECISION
TREE
Name of Institution

A restaurant owner has determined that she needs to

expand her facility. The alternatives are to expand large
now and risk smaller demand, or expand on a smaller
scale now knowing that she might need to expand again
in three years. Which alternative would be most
attractive?
• The likelihood of demand being high is .70
• The likelihood of demand being low is .30
• Large expansion yields profits of $3,00,000(high
demand) or $50,000(low demand)
• Small expansion yields profits of $80,000 if demand is
low
• Small expansion followed by high demand and later
expansion yield a profit of $2,00,000 at that point. No
expansion at that point yields profit of $15,00,000
Name of Institution
EVALUATING THE DECISION Name of Institution

TREE
• Decision tree analyses utilizes expected
value analysis (EVA)
• EVA is a weighted average of the chance
events
• Probability of occurrence*chance event
outcome
• Calculate the expected value for smaller
expansion
EVsmall =0.30(80,000)+0.70(2,00,000)
=$1,64,000
 Name of Institution

• Calculate expected value of large

expansion
EVlarge =0.30($50,000)+0.70($3,00,000)
= $2,25,000
Choose large expansion.
 PROBLEM Name of Institution
Following is the data of a bakery named J. J. Bakery located in
Lucknow. The data includes the production information in units
of past 6 months of year 2011. The number of workers working
in the bakery are 35 and the working shift is 8 hours per day.
MONTHS ACTUAL OUTPUT EFFECTIVE DESIGN
(units) CAPACITY CAPACITY (units)
(units)
JULY 4,12,500 5,50,000 5,75,000

AUGUST 4,20,000 5,70,000 6,00,000

SEPTEMBER 4,00,000 5,25,000 5,80,000

OCTOBER 5,50,000 6,60,000 7,20,000

NOVEMBER 6,30,000 7,20,000 8,00,000

DECEMBER 8,50,000 9,20,000 10,30,000

 Name of Institution
MONTHS ACTUAL EFFECTIVE DESIGN UTILIZATION EFFICIEN
OUTPUT CAPACITY CAPACITY CY

JULY 4,12,500 5,50,000 5,75,000 71.73% 75.00%

AUGUST 4,20,000 5,70,000 6,00,000 70.00% 73.68%

SEPTEMBER 4,00,000 5,25,000 5,80,000 68.96% 76.19%

OCTOBER 5,50,000 6,60,000 7,20,000 76.38% 83.33%

NOVEMBER 6,30,000 7,20,000 8,00,000 78.75% 87.56%

DECEMBER 8,50,000 9,20,000 10,30,000 82.52% 92.39%

 CONCLUSION Name of Institution

Thus, we can conclude by saying that

process of capacity planning is essential in
any organization which helps in achieving
better results and creating a better growth
and future of the organization and thus,
providing a competitive edge.
Name of Institution