Question 1

The Summerville Vitamin Company manufactures bottles of animal-shaped chewable vitamins for children. This product line requires two work centers, tablet manufacturing and packaging. The tablet manufacturing work center has a current capacity of 140,000 bottles per month, and packaging is capable of 100,000 units per month. This year (year 0), monthly sales of the product line are expected to reach 100,000 units. Growth per month is projected at an additional 25,000 units through year 4 (i.e., 125,000 per month in year #1, 150,000 per month in year #2, etc.). Pre-tax profits are expected to be $5 per unit throughout the 4-year planning period. Two alternatives are being considered:

1) Expand both tablet manufacturing and packaging at the end of year 0 to a capacity of 200,000 units per month, at a total cost for both work centers of $2,250,000;

2) Expand packaging at the end of year 0 to 140,000 units per year, matching tablet manufacturing, at a cost of $1,200,000, then expanding both work centers to 200,000 units per month at the end of year 2, at an additional cost at that time of $1,400,000.

Summerville will not consider projects that don't show a 4th year positive net present value using a discount rate of 25%.

Use the information in Table 6.8. What is the pre-tax cash flow (net present value) for alternative #1 compared to the base case of doing nothing for the next four years?

Less than or equal to $5.1 million

More than $5.1 million but less than $5.3 million

More than $5.3 million less than $5.5 million

More than $5.5 million

Question 2

Burdell Labs is a diagnostic laboratory that does various tests (blood tests, urine tests, etc.) for doctors' offices in the Indianapolis area. Test specimens are picked up at the doctors' offices and are transported to the testing facility, with uniform arrivals throughout the day. All tests go through two testing centers in the testing facility, Test Center A and Test Center B. A has a current capacity of 1,000 units per week, and B is capable of 1,500 units per week. The facility operates 50 weeks per year. This year (year 0), test volumes are expected to reach 1,000 units per week. Growth per week is projected at an additional 200 units through year 5 (i.e., 1,200 per week in year #1, 1,400 per week in year #2, etc.). Pre-tax profits are expected to be $5 per test throughout the 5-year planning period. Two alternatives are being considered:

1)   Expand both Test Centers A and B at the end of year 0 to a capacity of 2,000 units per week, at a total cost for both Test Centers of $300,000;

2)  Expand Test Center A at the end of year 0 to 1,500 units per week, matching Test Center B, at a cost of $100,000, then expanding both Test Centers to 2,000 units per year at the end of year 3, at an additional cost at that time of $250,000.

 Burdell Labs will not consider projects that don't show a 5th year positive net present value using a discount rate of 15%.

Use the information in Table 6.6. What is the pre-tax cash flow (net present value) for alternative #1 compared to the base case of doing nothing for the next five years?  

Negative pre-tax cash flow

More than $0 but less than $80,000

More than $80,000 but less than $160,000

More than $160,000

Question 3

Mr. Lee is considering a capacity expansion for his supermarket. The annual sales projected for the next five years follow. The current capacity is equivalent to $300,000 sales. Assume a 20 percent pretax profit margin.

Year          Annual Sales($000)

1                   310

2                   320

3                   340

4                   370

5                   400

Using the information in Table 6.4, if Lee expands the capacity to an equivalent of $360,000 sales now (year 0), how much would pretax cash flow in year 1 increase because of this expansion?

Question 4

Mr. Lee is considering a capacity expansion for his supermarket. The annual sales projected for the next five years follow. The current capacity is equivalent to $300,000 sales. Assume a 20 percent pretax profit margin.

Year          Annual Sales($000)

1                   310

2                   320

3                   340

4                   370

5                   400

Using the information in Table 6.4, if Lee expands the capacity to an equivalent of $360,000 sales now (year 0), how much would pretax cash flow in year 5 increase because of this expansion?

Question 5

Mr. Lee is considering a capacity expansion for his supermarket. The annual sales projected for the next five years follow. The current capacity is equivalent to $300,000 sales. Assume a 20 percent pretax profit margin.

Year          Annual Sales($000)

1                   310

2                   320

3                   340

4                   370

5                   400

Using the information in Table 6.4, if Lee expands the capacity to an equivalent of $360,000 sales now (year 0), and then expands the capacity to an equivalent of $400,000 sales at the beginning of year 4, how much would pretax cash flow increase in total for all years (years 1 through 5)?

Question 6

The North Bend Manufacturing Company is producing two types of products, A and B. Demand forecasts for next year and other production-related information are provided in the following table:

Both products A and B are produced at the same operation called MASAC27A.

Use the information in Table 6.3 to help answer this question.

The company works 250 days every year and operates 2 shifts, each of which covers 8 hours. If a 25 percent capacity cushion is maintained, how many machines does the company need next year to fully cover the demand?

Question 7

The North Bend Manufacturing Company is producing two types of products, A and B. Demand forecasts for next year and other production-related information are provided in the following table:

Both products A and B are produced at the same operation called MASAC27A.

Use the information in Table 6.3 to help answer this question. Currently, the company has 12 MASAC27A machines, and financial constraints prevent any expansion for the next year. Assume 8 hours/shift, 2 shifts/day, 250 days/year, and that no overtime is allowed.  Capacity cushion is 25%.  Which one of the following alternatives will allow next year's demand to be fully covered?

Question 8

1. A company's production facility, consisting of two identical machines, currently caters only to product A. The annual demand for the product is 4000 units. Management has now decided to introduce another product, B, which uses the same facilities as that of product A. Product B has an annual demand of 2000 units. In view of the uncertainties involved in producing two products, management desires to have an overall 10 percent capacity cushion. Given the following additional information, how many more machines are required? (Assume 8 hours/shift, 2 shifts/day, 250 days/year, and that no overtime is allowed).

--------    -----------------------    -------------------------    ----------
Product   Processing time (hr/unit)    Setup time per batch (hr)    Batch size
--------   ------------------------    -------------------------    ----------
A                       2                                          8                          100
B                       2.8                                       16                        200
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Question 9

1. The single milling machine at Stout Manufacturing was severely overloaded last year. The plant operates eight hours per day, five days per week, and 50 weeks per year. Management prefers a capacity cushion of 15 percent. Two major types of products are routed through the milling machine. The annual demand for product A is 3000 units and 2000 units for product B. The batch size for A is 20 units and 40 units for B. The standard processing time for A is 0.5 hours/unit and 0.8 hours/unit for B. The standard setup time for product A is 2 hours and 8 hours for product B. How many new milling machines are required if Stout does not resort to any short-term capacity options?

Question 10

Which one of the following statements about capacity cushions is best?

Ans:

Companies with flexible flow processes tend to have small capacity cushions.

Companies with high capital costs tend to have large capacity cushions.

Companies that have considerable customization tend to have larger capacity cushions.

Constant demand rates require larger-capacity cushions.