Question

Hickory Manufacturing Company forecasts the following demand for a product (in thousands of units) over the next five years. Year 1 2 3 4 5 Forecast demand 60 79 81 84 84 Currently the manufacturer has seven machines that operate on a two-shift (8 hours each) basis. Twenty days per year are available for scheduled maintenance of equipment with no process output. Assume there are 250 workdays in a year. Each manufactured good takes 30 minutes to produce. a. What is the capacity of the factory? b. At what capacity levels (percentage of normal capacity) would the firm be operating over the next five years based on the forecasted demand? (Hint: Compute the ratio of demand to capacity each year.) Year: 1 2 3 4 5 Forecast demand: 60 79 81 84 84 Demand/capacity ratio c. Does the firm need to buy more machines? If so, how many? When? If not, justify.

Answer 1

The capacity of the Hickory Manufacturing Company's factory is 64,960 units per year. The capacity utilization based on forecasted demand does not exceed the current capacity within the next five years. Therefore, the company does not need to purchase additional machines during this period.

Step-by-step explanation:

Capacity Analysis for Hickory Manufacturing Company

To calculate the capacity of the factory, we need to determine the total available production time and then how many units can be produced in this time. With seven machines operating on a two-shift basis for 250 workdays a year, minus 20 days for maintenance, we have:

(250 workdays - 20 maintenance days) × 2 shifts/day × 8 hours/shift = 4,640 production hours/year

Since each unit takes 30 minutes to produce, each machine can theoretically produce:

2 units/hour × 4,640 hours = 9,280 units/year

For seven machines, the total capacity is:

9,280 units/machine/year × 7 machines = 64,960 units/year

To calculate the capacity level, which is the demand/capacity ratio, we determine this ratio for each of the forecasted years.

For Year 1: (60,000 units demand / 64,960 units capacity) × 100 = about 92.4%

Similar calculations can be done for other years to determine the capacity levels. Regarding whether the firm needs to buy more machines, we compare demand to capacity.

If the forecast demand significantly exceeds capacity for consecutive years, the firm should consider purchasing additional machines. However, from the forecasted demands given, it appears the current capacity would suffice for the next five years.

If demand continues to rise beyond the fifth year or efficiency improvements are desired, the company could invest in more machines or optimize shift patterns and machine utilization to handle the increased load without immediate investment in new machinery.