EXERCISE QUESTIONS FOR EVALUATING CAPACITY (and Product mix)

Question 1

A law firm specializes in the issuance of insurance policies covering large commercial real estate
projects. The projects fall into two categories: shopping centers, and medical complexes. The
typical work involved in each transaction is quite predictable and repetitive. The time
requirements (unit loads) for preparing a standard contract of each type are given in table
below. Also listed are the number of professionals of each type and the number of available
hours per professional per day (the rest of time is taken by other office activities):

Hours available
Unit Load - Unit Load -
No. of (hours per
Shopping (hours Medical (hours
Professionals professional per
per contract) per contract)
day)
Paralegal 4 6 4 6
Tax lawyer 1 3 3 8
Senior partner 1 1 2 4

For the month of Nov. 2010, the firm has generated 150 orders, 75 of each type. Assume one
month equals 20 days.

a) What is the effective capacity of the process (contracts per day)?

b) Can the company process all 150 cases in November?

c) If the firm wishes to process all the 150 cases available in November, how many professionals
of each type are needed?
 Question 1 - SOLUTION
a)

The product mix is 50% shopping centres and 50% medical complexes. This is used to obtain a
weighted average unit load:

Average Unit Load Hourly Capacity Daily Capacity Daily Firm Capacity
(hours per contract) (contracts per person per hour) (contracts per person per day) (contracts per day)
Paralegal 0.5(4) + 0.5(6) = 5 1⁄ = 0.2 0.2 × 6 = 1.2 1.2 × 4 = 4.8
5
Tax Lawyer 2 0.5 0.5 × 8 = 4 4 × 3 = 12
Senior Partner 1 1 1×4=4 4×2 = 8

Our solution suggests there is a bottleneck with the paralegals. Consequently, the firm’s
capacity is 4.8 contracts per day.

b)

The problem tells us there are 20 working days in the month. Therefore, the monthly capacity
of the firm is:

20 days × 4.8 contracts/day = 96 contracts

Naturally, the firm is therefore unable to process 150 contracts in a month.

c)

Daily Capacity Monthly Capacity

(contracts per person per day)
# Employees Required
(contracts per person per month)
150 contacts/month
Paralegal 0.2 × 6 = 1.2 1.2 × 20 = 24 = 6.25 → 7
24 contracts / month / person

Tax Lawyer 0.5 × 8 = 4 80 2

Senior Partner 1×4=4 80 2

Question 2

Reconsider the law firm of Question1. Assume the prevailing revenues per shopping and
medical projects are $4000 and $5000 per project, respectively, and that out of pocket
expenses associated with each project are negligible. The (fixed) cost of operating the office is
$500,000 per month.

a) What type of project is the most profitable?

b) At the current project mix (50%-50%), how much contribution margin is generated ($ per
day)?

c) At the current product mix, what is the profit at capacity?

d) At the current product mix, what is the value of hiring an extra Paralegal?
 Question 2 - SOLUTION
Shopping Centre

Unit Load Hourly Capacity Daily Capacity Daily Firm Capacity

(hours per contract) (contracts per person per hour) (contracts per person per day) (contracts per day)
Paralegal 4 1⁄ = 0.25 0.25 × 6 = 1.5 1.5 × 4 = 6
4
Tax Lawyer 1 1 1×8=8 8 × 3 = 24
Senior Partner 1 1 1×4=4 4×2 = 8

Completing only shopping centre contracts yields 6 × $4,000/contract = $24,000

Medical Complex

Unit Load Hourly Capacity Daily Capacity Daily Firm Capacity

(hours per contract) (contracts per person per hour) (contracts per person per day) (contracts per day)
Paralegal 6 1⁄ = 0.16̅ 0.16̅ × 6 = 1 1×4 = 4
6
Tax Lawyer 3 0. 3̅ 0. 3̅ × 8 = 2. 6̅ 2. 6̅ × 3 = 8
Senior Partner 1 1 1×4=4 4×2 = 8

Completing only shopping centre contracts yields 4 × $5,000/contract = $20,000

The firm’s profit is maximized by focusing on shopping centre contracts.

b) In the 50-50 mix, firm capacity was 4.8 contracts per day (or 2.4 contracts of each type). This
yields the following revenue:

2.4($4000) + 2.4($5000) = $21,600

c) Profit at capacity is:

$500,000
$21,600 − = −$3,400 per day
20
d) A fifth paralegal increases the firm capacity to 1.2 × 5 = 6 contracts per day, yielding:

3($4000) + 3($5000) = $27,000

The difference is the value in adding a fifth paralegal: $27,000 - $21,600 = $5,400/day
Question 3

Three hairstylists, Francois, Bernard, and Mimi, run Fast Service Hair Salon for busy
professionals in the Gold Coast area of downtown Chicago (See Figure below).

Styling Billing
Shampoo
Reception 15 minutes 5 minutes
10 minutes
3 minutes Francois, Francois,
Francois,
LuLu Bernard, or Bernard, or
Bernard, or
Mimi Mimi
Mimi

They stay open from 6:45 a.m. to 9:00 p.m. in order to accommodate as many people's work
schedules as possible. They perform only shampooing and hairstyling activities. On average, it
takes 10 minutes to shampoo, 15 minutes to style the hair, and 5 minutes to bill the customer.
When a customer arrives, he or she first checks in with the receptionist (Bernard's younger
sister LuLu). This takes only 3 minutes. One of the three stylists then takes charge of the
customer and performs all three activities – shampooing, styling, and billing- consecutively.

a) What is the number of customers that can be serviced per hour in this hair salon?

b) A customer of Fast Service Hair Salon, an operations specialist, has suggested that the billing
operation be transferred to LuLu. What would be the impact on the theoretical capacity?

Question 3 - SOLUTION

Unit Load Capacity # Employees Firm Capacity

(min/customer) (per hour per employee) (per hour)
Reception 3 20 1 20
Shampoo/Styling/Billing 30 2 3 6

The salon can serve 6 customers per hour.

Unit Load Capacity # Employees Firm Capacity

(min/customer) (per hour per employee) (per hour)
Reception 8 7.5 1 7.5
Shampoo/Styling/Billing 25 2.4 3 7.2

The impact is a much more balanced design where the capacity is similar among all
operations. The new firm capacity is 7.2 customers per hour.
Question 4

A company makes two products A and B, using a single resource pool. The resource is available
for 900 minutes per day. The contribution margins for A and B are $20 and $35 per unit
respectively. The unit loads are 10 and 20 minutes per unit.

a) Which product is more profitable?

b) The company wishes to produce a mix of 60% As and 40% Bs. What is the effective capacity
(units per day)?

c) At the indicated product mix, what is the financial capacity (profit per day)?

Question 4 - SOLUTION
a)

Product Unit Load Hourly Capacity Hourly Margin

A 10 min/unit 6 units/hour $120/hour
B 20 min/unit 3 units/hour $105/hour

Product A is more profitable.

b)

Unit Load: 0.6(10) + 0.4(20) = 14 min/unit

900 minutes
Daily Capacity: = 64.28 units → 64 units
14 minutes/unit

c)

Volume Margin
A 0.6(64) = 38.5 $20(38.5) = $770
B 0.4(64) = 25.6 $35(25.6) = $896
$1,666

At the current mix, daily contribution is approximately $1,666.

Question 5

Consider a process consisting of three resources:

Resource Processing Time (min/unit) Number of Workers

1 10 2
2 6 1
3 16 3

a) Where is the bottleneck?

b) What is the process capacity?

c) What is the flow rate if demand is 8 units per hour?

d) What is the utilization of each resource if demand is eight units per hour?

Question 5 - SOLUTION

Unit Load Hourly Capacity Hourly

Resource # Employees
(min/unit) (per employee) Capacity
1 10 6 2 12
2 6 10 1 10
3 16 3.75 3 11.25

a) A bottleneck exists in the second resource.

b) The firm’s capacity is 10 units per hour.

c) Since this is below capacity, the realized flow rate is 8 units per hour

d)

Resource Hourly Capacity Flow Rate Utilization

8
1 12 8 = 66%
12

2 10 8 80%

3 11.25 8 71%
Question 6

Consider a process consisting of five resources that are operated 8 hours per day. The process
works on three different products, A, B and C.

Number of Processing Time Processing Time Processing Time

Resource
Workers for A (min/unit) for B (min/unit) for C (min/unit)
1 2 5 5 5
2 2 3 4 5
3 1 15 0 0
4 1 0 3 3
5 2 6 6 6

Demand for the three different products is as follows: product A, 40 units per day; product B,
50 units per day; and product C, 60 units per day.

a) Where is the bottleneck?

b) What is the flow rate for each flow unit assuming that demand must be served in the mix
described above (i.e., for every four units of A, there are units of B and six units of C)?
 Question 6 - SOLUTION

Product mix is

40
= 26. 6̅% Product A
150
50
= 33. 3̅% Product B
150
60
= 40% Product C
150

Expected Unit Load is:

Processing Time Processing Time Processing Time Unit Load

Resource
for A (min/unit) for B (min/unit) for C (min/unit) (min/unit)
1 5 5 5 0.26(5) + 0.33(5) + 0.4(5) = 5
2 3 4 5 4.13
3 15 0 0 4
4 0 3 3 2.2
5 6 6 6 6

Unit Load Capacity Firm Capacity

Resource # Employees
(min/unit) (per hour per employee) (units/hour)
1 0.26(5) + 0.33(5) + 0.4(5) = 5 12 2 24
2 4.13 14.53 2 29
3 4 15 1 15
4 2.2 27.27 1 27
5 6 10 2 20

The bottleneck is at Resource 3. This yields a daily capacity of 120 units per day.

b) Assuming a capacity of 120 units, the daily flow, by product type is:

Volume (units per day)

A 0.26̅(120) = 32
B . 33̅(120) = 40
C . 4(120) = 48