PROBLEMS

1. The staff-training center at a large regional hospital provides training sessions in CPR to all
employees. Assume that the capacity of this training system was designed to be 1800 employees
per year. Since the training center was first put in use, the program has become more complex, so
that 1400 now represents the most employees that can be trained per year. In the past year, 1350
employees were trained. Calculate the efficiency and the utilization of this system.

2. An executive conference center has the physical ability to handle 1,100 participants. However,
conference management personnel believe that only 1,000 participants can be handled effectively
for most events. The last event, although forecasted to have 1,000 participants, resulted in the
attendance of only 950 participants. What are the utilization and efficiency of the conference
facility?

3. A fleet repair facility has the capacity to repair 800 trucks per month. However, due to scheduled
maintenance of their equipment, management feels that they can repair no more than 600 trucks per
month. Last month, two of the employees were absent several days each, and only 400 trucks were
repaired. What are the utilization and efficiency of the repair shop?

4. The local convenience store makes personal pan pizzas. Currently, their oven can produce 50
pizzas per hour. It has a fixed cost of $2,000, and a variable cost of $0.25 per pizza. The owner is
considering a bigger oven that can make 75 pizzas per hour. It has a fixed cost of $3,000, but a
variable cost of $0.20 per pizza.
a. At what quantity do the two ovens have equal costs?
b. If the owner expects to sell 9,000 pizzas, should he get the new oven?

5. A product is currently made in a process-focused shop, where fixed costs are $9,000 per year and
variable cost is $50 per unit. The firm sells the product for $200 per unit. What is the break-even
point for this operation? What is the profit (or loss) on a demand of 200 units per year?

6. A product is currently made in a process-focused shop, where fixed costs are $8,000 per year and
variable cost is $40 per unit. The firm currently sells 200 units of the product at $200 per unit. A
manager is considering a repetitive focus to lower costs (and lower prices, thus raising demand).
The costs of this proposed shop are fixed costs = $24,000 per year and variable costs = $10 per
unit. If a price of $80 will allow 400 units to be sold, what profit (or loss) can this proposed new
process expect? Do you anticipate that the manager will want to change the process? Explain.

7. A firm sells two products. Product R sells for $20; its variable cost is $6. Product S sells for $50;
its variable cost is $30. Product R accounts for 60 percent of the firm's sales, while S accounts for
40 percent. The firm's fixed costs are $4 million annually. Calculate the firm's break-even point.
8. A firm is weighing three capacity alternatives: small, medium, and large job shop. Whatever
capacity choice is made, the market for the firm's product can be "moderate" or "strong." The
probability of moderate acceptance is estimated to be 40 percent; strong acceptance has a
probability of 60 percent. The payoffs are as follows. Small job shop, moderate market = $24,000;
Small job shop, strong market = $54,000. Medium job shop, moderate market = $20,000; medium
job shop, strong market = $64,000. Large job shop, moderate market = -$2,000; large job shop,
strong market = $96,000. Which capacity choice should the firm make?

A firm produces three products in a repetitive process facility. Product A sells for $60; its variable
costs are $20. Product B sells for $200; its variable costs are $80. Product C sells for $25; its
variable costs are $15. The firm has annual fixed costs of $320,000. Last year, the firm sold 1000
units of A, 2000 units of B, and 10,000 units of C. Calculate the break-even point of the firm. The
firm has some idle capacity at these volumes, and chooses to cut the selling price of A from $60 to
$45, believing that its sales volume will rise from 1000 units to 2500 units. What is the revised
break-even point?

9. Health Care Systems of the South is about to buy an expensive piece of diagnostic equipment. The
company estimates that it will generate uniform revenues of $500,000 for each of the next eight
years. What is the present value of this stream of earnings, at an interest rate of 6%? What is the
present value if the machine lasts only six years, not eight? If the equipment cost $2,750,000,
should the company purchase it?
 A firm produces three products. Product A sells for $60; its variable costs are $20. Product B sells
for $200; its variable costs are $120. Product C sells for $25; its variable costs are $10. Last year,
the firm sold 1000 units of A, 2000 units of B, and 10,000 units of C. The firm has fixed costs of
$320,000 per year. Calculate the break-even point of the firm.

10. A firm is about to undertake the manufacture of a product, and is weighing three capacity
alternatives: small job shop, large job shop, and repetitive manufacturing. The small job shop has
fixed costs of $3,000 per month, and variable costs of $10 per unit. The larger job shop has fixed
costs of $12,000 per month and variable costs of $3 per unit. The repetitive manufacturing plant
has fixed costs of $30,000 and variable costs of $1 per unit. Demand for the product is expected to
be 1,000 units per month with "moderate" market acceptance, but 2,000 under "strong" market
acceptance. The probability of moderate acceptance is estimated to be 60 percent; strong
acceptance has a probability of 40 percent. The product will sell for $25 per unit regardless of the
capacity decision. Which capacity choice should the firm make?

11. A new machine tool is expected to generate receipts as follows: $5,000 in year one; $3,000 in year
two, nothing in the next year, and $2,000 in the fourth year. At an interest rate of 6%, what is the
present value of these receipts? Is this a better present value than $2,500 each year over four years?
Explain.

12. Advantage Milling Devices is preparing to buy a new machine for precision milling of special
metal alloys. This device can earn $300 per hour, and can run 3,000 hours per year. The machine is
expected to be this productive for four years. If the interest rate is 6%, what is the present value?
What is the present value if the interest rate is not 6%, but 0%? Why does present value fall when
interest rates rise?