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Capacity Management by jso19979

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									Capacity Management Example
MBA 710
Dr. Dave Bukovinsky

A stamping machine costs $400,000 per year to operate.
The machine can produce 200 stampings per hour.
The machine runs 24 hours per day.
The company does not work on weekends (104 days) or holidays (10 days)
Downtime for maintenance, setups, etc. averages 15 days per year.
The machine is idle because of lack of materials for an average of 5 days per year.
The equivalent of 8 days of production is lost each year because of defects
    produced by the machine.
Management expects to produce an average of 1,000,000 stampings per year
    over the next five years.
Planned output for the current year was 1,050,000 stampings.
Actual output for the current year was 1,032,000 stampings, requiring 215 days.
If successfully negotiated, a new contract with a customer would increase demand
    for the stampings by 24,000 units per year.
Traditional cost allocation measures
                                                       Operating    Cost per
                                            Output       cost         unit
Theoretical capacity
Units per hour                                   200
Hours per day                          *          24
Days per year                          *         365
Theoretical capacity                   =   1,752,000     $400,000      $0.228

Practical capacity
Units per hour                                   200
Hours per day                          *          24
Operating days per year*               *         231
Practical capacity                     =   1,108,800     $400,000      $0.361
* 365-104-10-15-5=231 days

Normal capacity
Expected 5 year average output             1,000,000     $400,000      $0.400

Budget capacity
Planned output for the current year        1,050,000     $400,000      $0.381

Actual capacity
Actual output for the current year         1,032,000     $400,000      $0.388
                                              Output            Cost per
    Capacity category     Days         (4,800 units per day)      unit         Capacity cost
Rated                            365                1,752,000     $0.228              $   400,000
Productive                       215                1,032,000     $0.228                  235,616
Nonproductive
    Setups               15              72,000                   $0.228 $    16,438
    Standby               5              24,000                   $0.228       5,479
    Defects               8              38,400                   $0.228       8,767
Subtotal                         28                  134,400      $0.228                    30,685
Idle
    Weekends, holidays   114           547,200                    $0.228 $   124,932
    Marketable             5            24,000                    $0.228       5,479
    Not marketable         3            14,400                    $0.228       3,288
Subtotal                         122                 585,600      $0.228                   133,699
Total                            365               1,752,000      $0.228               $   400,000




      100%
                                            $30,685                    Nonproductive
       90%                                                               capacity

       80%
                                            $133,699
       70%
                                         Idle capacity
       60%

       50%
40%

30%    $235,616
20%
      Productive
10%
       capacity

0%
                                             Operating                 Cost per
             Capacity category                 cost         Volume     stamping
Rated                                       $  400,000     1,752,000   $ 0.228

Productive                                  $    400,000   1,032,000   $   0.388

If the new order is received
Current productive                                         1,032,000
Productive capacity from new order                            24,000
New total productive capacity               $    400,000   1,056,000   $   0.379

If defects can be eliminated and output sold
Current productive                                         1,032,000
Productive capacity from reduced defects                      38,400
New total productive capacity                $   400,000   1,070,400   $   0.374

If defects and standby can be eliminated and output sold
Current productive                                         1,032,000
Productive capacity from reduced defects                      38,400
Productive capacity from reduced standby                      24,000
New total productive capacity               $    400,000   1,094,400   $   0.365

								
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