Capacity planning involves determining the production capacity needed by an organization to meet demand. It considers both short-term and long-term managerial planning and control of resources. Key aspects of capacity planning include designing facilities to accommodate large changes in long-term demand, making limited adjustments for seasonal fluctuations using methods like inventory control and adjusting workforce size, and making finer short-term adjustments to meet random demand changes. Effective capacity planning requires evaluating factors like technology, costs, flexibility, and demand uncertainty when selecting optimal plant sizes and production levels.

1. CAPACITY
PLANNING

2. • Production capacity is the maximum
production rate of an organization. ( eg, no of
units per day )
• To meet demand with supply at any point of
time, is to be followed for producing products
or services at minimum total cost.
• Utilisation of supply capacity of organisation is
maximised to meet this objective.
• Capacity planning can include designing new
system, expansion of exisiting facilities,
• Depends on the short term or long term
managerial planning and control of resources.

3. Aspects of capacity planning.
• 1. Large increments in capacity required for changes in
demand over long term.
• For Certain technologies, capacity can be increased only in
large numbers. Though they may not be fully utilised.
• Addition of productive capacity lead to step increases in
fixed costs, which are absorbed gradually, over the increase
in demand in time.
• This decides the upper limit or system design capacity.
• 2. with in constraints imposed by systems capacity, limited
adjustments can be made for periods upto a year or two, to
cover seasonal fluctuations.
• The resulting aggregate planning relies on use of
inventories, changes in size of work force through hiring
and lay offs, use of overtime, subcontract orders.
• 3. finer adjustments in capacity needed to meet random
short term demand. This is done weekly or daily basis ,

4. Evaluation of alternate plant size.
• Plant size decide the production capacity.
• Depends on technology.
• Centralize or decentralized located in more
places.
• Management don’t consider only production
or distribution costs but also effects of
decision on competition, organizational
structure.
• Flexiblity needed to accommodate future
changes.

5. • While doing capacity studies, in selecting the option
following points should be considered.
1. Increase in plant size require large investment, but
can lead to significant economics of scale near full
capacity production volume. Usually will help in
savings in construction and equipment per unit of
capacity
2. Smaller fixed costs.( means
utilities, insurance, supervision are same for wide
range of capacity)
3. Lower variable costs as will be distributed to more
units.
4. Other variable costs like purchase, shipping etc., will
be lowered. lower processing costs from specialised
machines
Cost volume profit analysis done to select the best
option.

6. Design and system capacity.
• Planned rate of output of goods and services under
normal, full scale operating conditions.
• Or it is the maximum production or service aimed at
when the plant was established or revamped.
• Examples like no. of seats in theatre, no of seats in
college, etc.,
• Although facilites are designed to a
capacity, uncertainity in demand makes to difficult for
optimum utilisation.
• Some management meets all demand and don’t mind
surplus capacity. Some may not go for excess and may
not satisfy all customers. Best approach to have a
balanced approach.

7. • System capacity ( Sustainable capacity) is the maximum
output of a product than can be achieved in reality by
a production system, within the frame work of a
realistic work schedule, taking account of normal down
time, and assuming sufficient availability of inputs to
operate the machinery and equipments in place.
• It can be less than or equal to the design capacity. And
due to following reasons.
1. Equipment breakdown
2. Absenteesim of personnel.
3. Product mix specification which do not use facilities
uniformly.
4. Demand fluctuation
5. Imbalances between equipment and labour
6. Inefficiency on the part of managers, workers, sales
man etc.,

8. Measurement of capacity.
• For single or homogeneous products the units used
to measure output rate capacity are clear. Like
automobiles per day, tones of coal per day.
• For product mix, or firm producing wide range of
products, aggregate unit of capacity to be
established. Must allow to covert the output rates
of products to common unit of output measures.
• Capacity planning in services, output measures are
difficult. In these cases, input rate capacity measures
may be used. Like hotels use no of rooms available
for occupancy. Capacity utilization percentage
relates output measures to inputs available.

9. DESIGN CAPACITY = 1000
TONS.
IDEAL CAPACITY
SYSTEM CAPACITY = 800
TONS.
REAL CAPACITY
ACTUAL CAPACITY = 850
TONS.
ACHIEVED OUTPUT.
SYSTEM EFFICIENCY = ACTUAL OUTPUT/
SYSTEM CAPACITY.

10. A foundry producing alloy castings wishes to install
enough furnaces of a certain type to produce 5,00,000
kg of molten metal per year. Each furnace takes about
30 min to melt 50 kg. out put is typically 3% defective .
How many furnaces will be required if each one is
available for 2000 hrs per year.
• Actual output required = 5,00,000 kg.
• System efficiency = 1- 0.03= 0.97.
• Capacity of each furnace = 50 kg/ 30 min.
• Annual capacity = 2000*2*50= 2,00,000 kg.
• SE= Actual output/ system capacity
• System capacity required = 500000/capacity of each
furnace. = 515464.
• No furnace required = system capacity/ capacity of
each furnace.
• 515464/200000 = 2.57 or can say 3 nos.

11. A Fabrication section must supply 4000 good parts daily
to another department for assembly . Processing time
is 3 min/unit. Efficiency of the equipment for two shift
daily is estimated at 80%. Determine the number of
equipments.
2. 2% defective units are assumed in production. Consider
this to decide the number of units.
In addition calculation of requirement may include the
workers fatigue, overtime, defective parts produced
into consideration.
• STAGE EFFICIECY = H/D
• H expected running time per period in hours.
• D available running time per period in hours.
• Time loss is set up time + down time.
• So H = D – time lost.

12. • An assembly line has four work centre A,B,C,D in
series , determine system capacity and system
efficiency.
ACTUAL OUTPUT
390
400
360
450
A
B
C
D
• Slowest one decides the output capacity , so
system capacity is 360 units,
• System efficiency = actual output / system
capacity
• SE = 306/360 = 0.85
308
UNITS
PER
DAY

13. Location A would result in annual fixed cost of
Rs.3,00,000, variable costs of Rs.63 per unit
and revenue Rs.68 per unit. Annual fixed cost
of Location B is Rs.8,00,000 , and variable
costs are Rs.32 per unit. And revenues are
Rs.68 per unit. Sales volume is estimated to be
25000 units per year. Which location is
attractive.

14. Empire glass company can produce a certain insulator
on any three machines which have the following
charges as shown below. The form has oppurtunity
to accept order for either for 1) 50 units at Rs.20 /
unit.
2) 150 units at Rs.12 /unit.
Machine.
Fixed cost in Rs
Variable cost in Rs.
A
50
4/ Unit
B
200
2/ unit
C
400
1/ unit.
1. Which machine should be used if 50 units order is
accepted and what profit will result.
2. Which machine for 150 units.
3. Break even volume for machine B, when price is
Rs.12 per unit.

15. Actual demand for a product is expected in mfg. company is as
follows
Units
demanded
6000
9000
16000
19000
Probability
0.4
0.2
0.3
0.1
Revenues are Rs.50 per unit. The existing mfg. facility has annual
fixed operating costs of Rs.300000. Variable costs are Rs.7, Rs.8,
Rs.6 and Rs. 9/ unit respectively for various demands listed
above.
As expanded facility under consideration would require Rs.350000
fixed operating cost annually , variable cost would be Rs.11, Rs.
7, Rs.8, Rs.6 / unit at different demand levels respectively. To
maximize net earning which facility should be selected.

16. Rs.800
21
Rs.700
a
p = 0.2
22
c
Rs.900
Rs.1000
1
Rs.1000
Rs.2000
23
Rs.1000
b
Rs.800
p = 0.4
Costs are shown and
solve the decision tree.
Rs.700
24
d
Rs.500

17. A manufacturer of tools comes out with 2 alternatives A to modify product, B make
and market a new product. Stage 1 is given below.
INITITAL DEMAND PROBABILITIES
PAY OFF ON HIGH.
ALTERNATIVES.
LOW
HIGH
DEMAND
A
0.3
0.7
4 lakhs
B
0.5
0.5
6 lakhs.
The first stage choice leads to further consequences and choices only when the
demand turns out to be low.
I stage
II stage
Final
probability Pay off.
Choice.
alternative demand.
Lakhs.
0.2
0.2
HIGH
0.8
1.5
LOW
0.9
0.4
HIGH
0.1
2.0
Reduce
price.
B
LOW
Increase
price
A
Reduce
price
LOW
0.2
0.3
HIGH
0.8
1
Increase
price.
LOW
1.0
0.5
HIGH
0.0
3

18. Decision tree analysis
• Decision about facility planning are complex. They are
often difficult to organise because they are multiphase
decision.
• Interdependent decisions are made in a sequence.
• it aids to analysts who must see clearly what decisions
must be made, in what sequence it should occur, and
the interdependence of decisions.
• Direct way of dealing with uncertain events.
• Objective way of determining the relative value of each
decision alternative.
• Every decision point junction or nodes are marked
with square and circle for chance events.