Capacity

Planning

1
 Capacity Planning
 Capacity is the upper limit or ceiling on
the load that an operating unit can handle.
 Capacity planning is the process of
determining the production capacity needed
by an organization to meet changing
demands for its products.
 The basic questions in capacity handling
are:
 What kind of capacity is needed?
 How much is needed?
 When is it needed?

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Importance of Capacity Decisions
 Impacts ability to meet future demands
 Affects operating costs
 Major determinant of initial costs
 Involves long-term commitment
 Affects competitiveness
 Affects ease of management

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 Capacity
 Design capacity
 maximum obtainable output
 Effective capacity
 Maximum capacity given product mix,
scheduling difficulties, and other doses
of reality.
 Actual output
 rate of output actually achieved--cannot
exceed effective capacity.
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Capacity is calculated:

 (number of machines or
workers) x (number of shifts)
x (utilization) x (efficiency).

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 Efficiency and Utilization

Actual output
Efficiency =
Effective capacity

Actual output
Utilization =
Design capacity

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 Efficiency/Utilization Example
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day

Efficiency = Actual output = 36 units/day =

90%
Effective capacity 40 units/ day

Utilization = Actual output = 36 units/day =

72%
Design capacity 50 units/day

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 Determinants of Effective
Capacity
 Facilities
 Products or services
 Processes
 Human
considerations
 Operations
 External forces
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 Some Possible Growth Patterns
Figure 1
Volume

Volume
Growth Decline

0 0 Time
Time

Cyclical Stable

Volume
Volume

0 0
Time Time
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Developing Capacity Alternatives
 Design flexibility into systems
 Take a “big picture” approach to capacity
changes
 Prepare to deal with capacity “chunks”
 Attempt to smooth out capacity
requirements
 Identify the optimal operating level

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 Evaluating Alternatives
Figure 2
Production units have an optimal rate of output for minimal cost.
Average cost per unit

Minimum
cost

0 Rate of output
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 Evaluating Alternatives
Figure 3
Minimum cost & optimal operating rate are
functions of size of production unit.
Average cost per unit

Small
plant Medium
plant Large
plant

0 Output rate
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 Planning Service Capacity

 Need to be near customers

 Capacity and location are closely tied
 Inability to store services
 Capacity must me matched with timing of
demand
 Degree of volatility of demand
 Peak demand periods

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Calculating Processing Requirements
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AA nnnnuuaal l ppr roocceessssi ni ngg t ti mi m ee PP r roocceessssi ni ngg t ti mi m ee
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## 11 44 00 00 55 . .00 22 , ,00 00 00

## 22 33 00 00 88 . .00 22 , ,44 00 00

## 33 77 00 00 22 . .00 11 , ,44 00 00
55 , ,88 00 00

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 Cost-Volume Relationships
Figure 4

FC
+
Amount ($)

VC C)
= t (V
ost os
t al c
bl ec
To ria
va
t al
To
Fixed cost (FC)

0
Q (volume in units)
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 Cost-Volume Relationships
Figure 5

ue
en
Amount ($)

v
l re
t a
To

0
Q (volume in units)
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 Cost-Volume Relationships
Figure 6

u e
e n f i t
Amount ($)

e v r o
r P
al t
t o s
To t a l c
To

0 BEP units
Q (volume in units)
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Break-Even Problem with Step Fixed Costs
Figure 7

C =
+ V
FC
C TC
C =T
+V
FC 3 machines
T C
C =
V
+ 2 machines
FC

1 machine
Quantity
Step fixed costs and variable costs.
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Break-Even Problem with Step Fixed Costs
Figure 8

$
BE
P 3
TC
BEP2
TC
3
TC
2
TR 1
Quantity
Multiple break-even points
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 Assumptions of Cost-Volume
Analysis
 One product is involved
 Everything produced can be sold
 Variable cost per unit is the same
regardless of volume
 Fixed costs do not change with volume
 Revenue per unit constant with volume
 Revenue per unit exceeds variable cost
per unit
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 Financial Analysis
 Cash Flow - the difference between
cash received from sales and other
sources, and cash outflow for labor,
material, overhead, and taxes.
 Present Value - the sum, in current
value, of all future cash flows of an
investment proposal.

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