Category

Capacity Management , Planning and Determinants of Effective Capacity

  1. Which of the following best defines ‘capacity’ in operations management?
    a) The number of employees working in a facility
    b) The maximum rate of output a process or system can achieve over a given time period
    c) The total floor area of a production facility
    d) The financial budget allocated to a production department
    Answer: b) The maximum rate of output a process or system can achieve over a given time period
  2. ‘Design capacity’ in operations management refers to:
    a) The capacity level at which a facility actually operates day-to-day
    b) The theoretical maximum output rate under ideal conditions
    c) The capacity remaining after accounting for planned downtime
    d) The minimum capacity required to meet customer demand
    Answer: b) The theoretical maximum output rate under ideal conditions
  3. ‘Effective capacity’ is best described as:
    a) The maximum output achievable under perfect conditions
    b) The capacity remaining after subtracting design capacity from actual output
    c) The expected output rate given realistic operating conditions, maintenance, and scheduling
    d) The total output produced in a given period divided by total hours
    Answer: c) The expected output rate given realistic operating conditions, maintenance, and scheduling
  4. ‘Actual output’ in capacity planning refers to:
    a) The maximum possible output under ideal conditions
    b) The rate of output that is actually achieved, which is often less than effective capacity
    c) The output planned during the budgeting process
    d) The output produced in the first shift only
    Answer: b) The rate of output that is actually achieved, which is often less than effective capacity
  5. The formula for calculating ‘capacity utilization’ is:
    a) Design capacity divided by actual output
    b) Actual output divided by design capacity, multiplied by 100%
    c) Effective capacity divided by actual output
    d) Actual output divided by effective capacity, multiplied by 100%
    Answer: b) Actual output divided by design capacity, multiplied by 100%
  6. ‘Efficiency’ in the context of capacity planning is calculated as:
    a) Actual output divided by design capacity
    b) Actual output divided by effective capacity, multiplied by 100%
    c) Design capacity divided by effective capacity
    d) Effective capacity divided by actual output
    Answer: b) Actual output divided by effective capacity, multiplied by 100%
  7. A facility has a design capacity of 500 units/day, effective capacity of 400 units/day, and actual output of 350 units/day. What is the efficiency?
    a) 70%
    b) 87.5%
    c) 80%
    d) 75%
    Answer: b) 87.5%
  8. Using the same data as above (design: 500, actual: 350), what is the utilization?
    a) 87.5%
    b) 70%
    c) 80%
    d) 75%
    Answer: b) 70%
  9. Which type of capacity planning covers a time horizon typically ranging from 1 to 5 years?
    a) Short-range capacity planning
    b) Long-range capacity planning
    c) Medium-range (intermediate) capacity planning
    d) Operational capacity planning
    Answer: c) Medium-range (intermediate) capacity planning
  10. Long-range capacity planning decisions typically involve:
    a) Scheduling individual employees on shifts
    b) Ordering raw materials for the next production run
    c) Major facility expansions, new plant construction, or equipment acquisition
    d) Adjusting overtime hours for the current week
    Answer: c) Major facility expansions, new plant construction, or equipment acquisition
  11. Short-range capacity planning (less than 3 months) typically includes which of the following options?
    a) Building a new factory
    b) Acquiring a competitor’s plant
    c) Hiring permanent full-time employees
    d) Using overtime, temporary workers, or subcontracting
    Answer: d) Using overtime, temporary workers, or subcontracting
  12. Which of the following is an example of a ‘capacity cushion’?
    a) Operating at exactly 100% of design capacity
    b) Maintaining capacity below effective capacity at all times
    c) Keeping extra capacity above expected demand to handle variability
    d) Reducing design capacity to match average demand
    Answer: c) Keeping extra capacity above expected demand to handle variability
  13. A capacity cushion is maintained primarily to:
    a) Reduce total production costs
    b) Allow for demand variability, prevent lost sales, and avoid overloading systems
    c) Eliminate the need for overtime
    d) Reduce the number of permanent employees
    Answer: b) Allow for demand variability, prevent lost sales, and avoid overloading systems
  14. ‘Best operating level’ in capacity management refers to:
    a) The capacity level that maximizes revenue regardless of cost
    b) The output rate at which average unit cost is minimized
    c) The level at which all machines run at 100% utilization
    d) The output rate that satisfies the maximum number of customers
    Answer: b) The output rate at which average unit cost is minimized
  15. ‘Economies of scale’ in capacity management occur when:
    a) Average cost per unit rises as production volume increases
    b) Fixed costs increase proportionally with output volume
    c) Average cost per unit decreases as production volume increases
    d) Variable costs decrease as the number of products diversifies
    Answer: c) Average cost per unit decreases as production volume increases
  16. ‘Diseconomies of scale’ refer to a situation where:
    a) Unit costs fall as output increases beyond optimal capacity
    b) Unit costs rise as output increases beyond the optimal operating level
    c) Total costs remain constant regardless of output level
    d) Fixed costs are spread across more units, reducing per-unit cost
    Answer: b) Unit costs rise as output increases beyond the optimal operating level
  17. Which of the following strategies involves adding capacity in large increments ahead of demand?
    a) Lead strategy
    b) Lag strategy
    c) Match strategy
    d) Reactive strategy
    Answer: a) Lead strategy
  18. A ‘lag strategy’ for capacity expansion means:
    a) Adding capacity before demand materializes
    b) Adding capacity only after demand has clearly exceeded existing capacity
    c) Adding capacity in small increments to match demand closely
    d) Outsourcing production when demand temporarily spikes
    Answer: b) Adding capacity only after demand has clearly exceeded existing capacity
  19. The ‘match strategy’ for capacity planning attempts to:
    a) Always maintain excess capacity
    b) Add capacity in large one-time expansions
    c) Incrementally add small amounts of capacity to track actual demand closely
    d) Operate at design capacity at all times
    Answer: c) Incrementally add small amounts of capacity to track actual demand closely
  20. Which of the following is a key output of the capacity planning process?
    a) A list of product defects
    b) A determination of when and how much capacity to add or reduce
    c) An employee performance appraisal
    d) A supplier evaluation scorecard
    Answer: b) A determination of when and how much capacity to add or reduce
  21. Which of the following is NOT typically listed as a determinant of effective capacity?
    a) Facility design and layout
    b) Product and service design
    c) Marketing budget allocation
    d) Process and equipment design
    Answer: c) Marketing budget allocation
  22. How does product design affect effective capacity?
    a) Products with fewer components always reduce capacity
    b) Standardized, well-designed products are generally easier to produce and can increase effective capacity
    c) Product design has no effect on manufacturing capacity
    d) Complex product designs always increase capacity by requiring more processing steps
    Answer: b) Standardized, well-designed products are generally easier to produce and can increase effective capacity
  23. Facility layout affects effective capacity primarily by:
    a) Determining the number of managers in a facility
    b) Influencing material flow, workstation accessibility, and the efficiency of the production process
    c) Setting the maximum number of products a firm can offer
    d) Defining employee salary structures
    Answer: b) Influencing material flow, workstation accessibility, and the efficiency of the production process
  24. Which facility layout type typically provides the highest flexibility for producing a wide variety of products?
    a) Product (line) layout
    b) Process (functional) layout
    c) Fixed-position layout
    d) Cellular layout
    Answer: b) Process (functional) layout
  25. Which facility layout type is generally associated with the highest throughput rate for standardized, high-volume production?
    a) Process layout
    b) Fixed-position layout
    c) Product (line) layout
    d) Cellular layout
    Answer: c) Product (line) layout
  26. How does process and equipment design affect effective capacity?
    a) Older equipment always provides higher effective capacity
    b) The type and reliability of equipment, along with process flow design, directly determine throughput rates
    c) Process design affects quality only, not capacity
    d) Equipment design affects safety but has no impact on output rates
    Answer: b) The type and reliability of equipment, along with process flow design, directly determine throughput rates
  27. ‘Human factors’ as a determinant of effective capacity include:
    a) The age of machinery in the facility
    b) Employee skills, training, motivation, absenteeism, and labor turnover
    c) The geographic location of the facility
    d) The type of raw materials used in production
    Answer: b) Employee skills, training, motivation, absenteeism, and labor turnover
  28. High employee absenteeism or turnover rates tend to:
    a) Increase effective capacity by creating opportunities for new hires
    b) Reduce effective capacity by creating workforce gaps and productivity losses
    c) Have no effect on effective capacity if machines are automated
    d) Increase effective capacity by reducing labor costs
    Answer: b) Reduce effective capacity by creating workforce gaps and productivity losses
  29. Which of the following operational factors can reduce effective capacity?
    a) Preventive maintenance programs
    b) High product quality standards with tight specifications
    c) Cross-training of employees
    d) Standardization of products
    Answer: b) High product quality standards with tight specifications
  30. ‘Quality considerations’ affect effective capacity because:
    a) Higher quality products always require more raw materials, reducing output
    b) Producing defective output means that real capacity is wasted on units that must be reworked or scrapped
    c) Higher quality standards always increase the speed of production
    d) Quality management eliminates the need for capacity planning
    Answer: b) Producing defective output means that real capacity is wasted on units that must be reworked or scrapped
  31. Scheduled maintenance affects effective capacity by:
    a) Permanently increasing machine speed
    b) Taking equipment out of service temporarily, reducing available production time
    c) Eliminating the need for capacity cushions
    d) Increasing design capacity beyond theoretical limits
    Answer: b) Taking equipment out of service temporarily, reducing available production time
  32. Which of the following supply chain factors can constrain effective capacity?
    a) Employee training programs
    b) Reliable supplier delivery and quality of incoming materials
    c) Marketing campaigns for new products
    d) Customer satisfaction surveys
    Answer: b) Reliable supplier delivery and quality of incoming materials
  33. ‘Product mix’ decisions affect capacity because:
    a) All products require identical processing time and resources
    b) Different products have different processing requirements, affecting how much total output can be produced
    c) Product mix only affects revenue, not production capacity
    d) A wider product mix always increases effective capacity
    Answer: b) Different products have different processing requirements, affecting how much total output can be produced
  34. Environmental and regulatory requirements affect effective capacity by:
    a) Always increasing output rates through mandated efficiency standards
    b) Potentially requiring additional processing steps, inspections, or equipment that consume capacity
    c) Eliminating the need for quality checks in regulated industries
    d) Removing the requirement to schedule maintenance
    Answer: b) Potentially requiring additional processing steps, inspections, or equipment that consume capacity
  35. Which of the following best describes the effect of ‘scheduling’ on effective capacity?
    a) Scheduling has no effect on capacity — only equipment determines output rates
    b) Poor scheduling can create bottlenecks and idle time that reduce effective capacity below its potential
    c) Scheduling only affects labor costs, not capacity
    d) Scheduling always maximizes effective capacity automatically
    Answer: b) Poor scheduling can create bottlenecks and idle time that reduce effective capacity below its potential
  36. A ‘bottleneck’ in a production process refers to:
    a) A stage with the highest throughput rate in the system
    b) Any workstation that operates faster than the preceding one
    c) The resource or process step that limits the overall output rate of the entire system
    d) A machine that produces the highest-quality output in a facility
    Answer: c) The resource or process step that limits the overall output rate of the entire system
  37. According to the Theory of Constraints, to improve system capacity, a manager should focus on:
    a) Improving the efficiency of every workstation equally
    b) Identifying and relieving the bottleneck that constrains total system throughput
    c) Purchasing the most expensive equipment available
    d) Reducing the number of product variants offered
    Answer: b) Identifying and relieving the bottleneck that constrains total system throughput
  38. Which of the following is an internal strategy for increasing capacity in the short run?
    a) Building a new facility
    b) Acquiring a competitor’s plant
    c) Using overtime and additional shifts
    d) Purchasing new heavy machinery
    Answer: c) Using overtime and additional shifts
  39. Subcontracting or outsourcing is used as a capacity strategy when:
    a) Internal demand is below normal levels
    b) Excess internal capacity cannot be profitably used
    c) Internal capacity is insufficient to meet demand and adding permanent capacity is not yet justified
    d) A firm wants to permanently reduce its workforce
    Answer: c) Internal capacity is insufficient to meet demand and adding permanent capacity is not yet justified
  40. ‘Demand management’ as a capacity strategy involves:
    a) Reducing workforce to match lower demand
    b) Using pricing, promotions, reservations, or backlogs to shift or smooth demand to match available capacity
    c) Building excess inventory during high demand periods
    d) Closing facilities during low demand periods
    Answer: b) Using pricing, promotions, reservations, or backlogs to shift or smooth demand to match available capacity
  41. Which of the following is an example of using demand management to address excess capacity?
    a) Offering discounts during off-peak periods to stimulate demand
    b) Building a new production facility
    c) Hiring temporary workers for the holiday season
    d) Subcontracting production to a third party
    Answer: a) Offering discounts during off-peak periods to stimulate demand
  42. ‘Inventory’ can be used as a capacity strategy by:
    a) Storing finished goods during slow periods to meet demand spikes later without increasing production capacity during peaks
    b) Reducing raw material purchases when demand is high
    c) Eliminating the need for capacity planning
    d) Increasing production speed during peak periods
    Answer: a) Storing finished goods during slow periods to meet demand spikes later without increasing production capacity during peaks
  43. Which of the following approaches is used to evaluate long-term capacity decisions?
    a) Gantt charts
    b) Break-even analysis and financial modeling including NPV
    c) Employee scheduling software
    d) Kanban systems
    Answer: b) Break-even analysis and financial modeling including NPV
  44. ‘Break-even analysis’ in capacity planning helps managers determine:
    a) The maximum quality level achievable at a given capacity
    b) The volume of output at which total revenue equals total cost for a given capacity investment
    c) The optimal number of employees needed at full capacity
    d) The best geographic location for a new facility
    Answer: b) The volume of output at which total revenue equals total cost for a given capacity investment
  45. A decision tree is a tool used in capacity planning to:
    a) Map employee skill levels across departments
    b) Evaluate sequential capacity decisions under uncertainty by modeling possible demand scenarios and outcomes
    c) Schedule maintenance on production equipment
    d) Identify product quality defects in the production process
    Answer: b) Evaluate sequential capacity decisions under uncertainty by modeling possible demand scenarios and outcomes
  46. In capacity planning, ‘waiting line (queuing) analysis’ is used to:
    a) Evaluate employee performance metrics
    b) Determine optimal production batch sizes
    c) Analyze the relationship between capacity, service rate, and customer waiting times
    d) Schedule preventive maintenance for equipment
    Answer: c) Analyze the relationship between capacity, service rate, and customer waiting times
  47. Which of the following is a qualitative factor that affects capacity decisions?
    a) The break-even volume for a new facility
    b) Net present value of a capacity expansion project
    c) Government regulations and community relations related to expansion
    d) The variable cost per unit at different output levels
    Answer: c) Government regulations and community relations related to expansion
  48. The ‘learning curve effect’ in capacity planning suggests that:
    a) Worker productivity decreases as they become more familiar with a task
    b) As cumulative production volume increases, the time required per unit tends to decrease due to learning and experience
    c) Learning curves only apply to new product development, not production capacity
    d) Capacity requirements increase proportionally with cumulative output
    Answer: b) As cumulative production volume increases, the time required per unit tends to decrease due to learning and experience
  49. Which of the following statements about capacity planning for services is true?
    a) Service capacity planning is identical to manufacturing capacity planning in all respects
    b) Services cannot store inventory as a buffer against demand fluctuations, making capacity planning more challenging
    c) Service organizations always have higher effective capacity than manufacturers
    d) Demand variability is not a concern in service capacity planning
    Answer: b) Services cannot store inventory as a buffer against demand fluctuations, making capacity planning more challenging
  50. ‘Chase demand strategy’ in aggregate planning involves:
    a) Maintaining a constant production rate regardless of demand fluctuations
    b) Adjusting production capacity (workforce levels) up or down to match the fluctuating demand pattern
    c) Building excess inventory during low demand to meet high demand later
    d) Outsourcing all production to external suppliers during peak demand
    Answer: b) Adjusting production capacity (workforce levels) up or down to match the fluctuating demand pattern
  51. For a manufacturing facility, capacity is most commonly expressed in terms of:
    a) Total revenue generated per year
    b) Units of output per unit of time (e.g., units per hour, tons per day)
    c) Total number of employees on the payroll
    d) Square footage of the production floor
    Answer: b) Units of output per unit of time (e.g., units per hour, tons per day)
  52. For service organizations, capacity is often measured by:
    a) Number of defects per million opportunities
    b) Units of physical product produced per shift
    c) Available service time or number of customers that can be served per period
    d) Total floor space of the service facility
    Answer: c) Available service time or number of customers that can be served per period
  53. Which of the following is the most appropriate measure of capacity for an airline?
    a) Number of aircraft in the fleet
    b) Available seat miles (ASMs) per year
    c) Total fuel consumed per month
    d) Number of pilots employed
    Answer: b) Available seat miles (ASMs) per year
  54. A hotel’s capacity is most meaningfully measured by:
    a) Revenue per available room (RevPAR) annually
    b) Number of available rooms (or room-nights per period)
    c) Total number of employees
    d) Square footage of the lobby
    Answer: b) Number of available rooms (or room-nights per period)
  55. Which statement correctly describes the relationship between design capacity, effective capacity, and actual output?
    a) Actual output > Effective capacity > Design capacity
    b) Design capacity >= Effective capacity >= Actual output
    c) Effective capacity > Design capacity > Actual output
    d) Actual output = Effective capacity = Design capacity always
    Answer: b) Design capacity >= Effective capacity >= Actual output
  56. If effective capacity is 80% of design capacity and efficiency is 90%, what is actual output as a percentage of design capacity?
    a) 72%
    b) 80%
    c) 90%
    d) 88%
    Answer: a) 72%
  57. Which of the following reduces the gap between design capacity and effective capacity?
    a) Increasing product variety without additional investment
    b) Improving preventive maintenance programs and reducing scheduled downtime
    c) Increasing the complexity of product specifications
    d) Reducing the workforce to cut costs
    Answer: b) Improving preventive maintenance programs and reducing scheduled downtime
  58. Which capacity measure is used to indicate how close an organization is to its theoretical maximum output?
    a) Efficiency
    b) Productivity index
    c) Utilization
    d) Throughput yield
    Answer: c) Utilization
  59. High utilization (close to 100%) is generally associated with:
    a) Low waiting times and fast throughput
    b) Increased flexibility and easy scheduling
    c) Increased congestion, longer queues, and reduced flexibility to handle variability
    d) Lower production costs per unit always
    Answer: c) Increased congestion, longer queues, and reduced flexibility to handle variability
  60. ‘Capacity requirements planning (CRP)’ in manufacturing is used to:
    a) Evaluate the financial viability of opening a new facility
    b) Determine the amount of labor and machine capacity needed to meet the production schedule derived from MRP
    c) Schedule employee vacation days
    d) Assess supplier reliability for raw material delivery
    Answer: b) Determine the amount of labor and machine capacity needed to meet the production schedule derived from MRP
  61. Which of the following industries faces the greatest challenge from ‘perishable capacity’?
    a) Steel manufacturing
    b) Automobile assembly
    c) Airline and hotel industries
    d) Chemical processing
    Answer: c) Airline and hotel industries
  62. ‘Perishable capacity’ in services means:
    a) Physical products that expire on the shelf
    b) Unused service capacity that cannot be stored or used later — once the moment has passed, that capacity is lost forever
    c) Service processes that degrade in quality over time
    d) Equipment that wears out faster than scheduled
    Answer: b) Unused service capacity that cannot be stored or used later — once the moment has passed, that capacity is lost forever
  63. A restaurant with 60 seats that operates 8 hours per day has a design capacity (in customer-hours) of:
    a) 60 customer-hours
    b) 480 customer-hours
    c) 68 customer-hours
    d) 8 customer-hours
    Answer: b) 480 customer-hours
  64. Which of the following actions increases a firm’s effective capacity without adding physical resources?
    a) Building an additional production facility
    b) Improving workforce scheduling, training, and reducing absenteeism
    c) Purchasing additional machinery
    d) Acquiring a competitor’s facilities
    Answer: b) Improving workforce scheduling, training, and reducing absenteeism
  65. ‘Rough-cut capacity planning (RCCP)’ is used during:
    a) Daily production scheduling
    b) The master production scheduling (MPS) process to check feasibility of the MPS against key resources
    c) Financial year-end reporting
    d) The hiring and onboarding of new employees
    Answer: b) The master production scheduling (MPS) process to check feasibility of the MPS against key resources
  66. Which of the following correctly describes ‘aggregate planning’?
    a) Detailed daily scheduling of individual machines and workers
    b) Medium-term planning that determines overall production levels, workforce size, and inventory levels to meet forecasted demand
    c) Strategic planning for new facility construction over 10 years
    d) Scheduling of individual customer orders through the factory
    Answer: b) Medium-term planning that determines overall production levels, workforce size, and inventory levels to meet forecasted demand
  67. ‘Level production strategy’ in aggregate planning involves:
    a) Varying the workforce size each month to exactly match demand
    b) Producing at a constant output rate regardless of demand fluctuations and using inventory to absorb the differences
    c) Outsourcing all production to external manufacturers
    d) Closing the facility during slow months to reduce costs
    Answer: b) Producing at a constant output rate regardless of demand fluctuations and using inventory to absorb the differences
  68. Which of the following is a ‘pure strategy’ in aggregate planning?
    a) Using a combination of overtime, subcontracting, and inventory changes
    b) Using only workforce variation (hiring and layoffs) to match demand
    c) Changing price and promotion to shift demand
    d) Setting a fixed budget and not changing production levels
    Answer: b) Using only workforce variation (hiring and layoffs) to match demand
  69. A ‘mixed strategy’ in aggregate planning:
    a) Uses only one capacity adjustment lever at a time
    b) Combines two or more options (e.g., overtime + inventory + subcontracting) to meet demand
    c) Is used only in service organizations
    d) Fixes workforce levels and never allows overtime
    Answer: b) Combines two or more options (e.g., overtime + inventory + subcontracting) to meet demand
  70. Which of the following tools is most commonly used to optimize aggregate production plans when multiple variables and constraints are present?
    a) Fishbone diagrams
    b) Linear programming
    c) Gantt charts
    d) Pareto analysis
    Answer: b) Linear programming
  71. ‘Focused factories’ as a capacity strategy suggest that:
    a) A single facility should produce as many different products as possible to maximize revenue
    b) Plants should be limited in the scope of their tasks — focusing on a narrow product/market/technology range — to achieve higher efficiency and lower cost
    c) All production should be centralized in one large facility
    d) Factories should focus exclusively on cost reduction rather than quality
    Answer: b) Plants should be limited in the scope of their tasks — focusing on a narrow product/market/technology range — to achieve higher efficiency and lower cost
  72. The concept of ‘plant within a plant (PWP)’ refers to:
    a) A small factory built inside a larger office building
    b) Dividing a large, unfocused facility into smaller, dedicated production units each with its own focused mission
    c) A satellite facility built near a major customer
    d) A backup facility used only during equipment failures
    Answer: b) Dividing a large, unfocused facility into smaller, dedicated production units each with its own focused mission
  73. Which of the following best describes ‘capacity flexibility’?
    a) The ability to operate at exactly design capacity at all times
    b) The ability to rapidly increase or decrease output to respond to changes in demand
    c) The maintenance of fixed production rates regardless of market conditions
    d) The use of a single production line for all products
    Answer: b) The ability to rapidly increase or decrease output to respond to changes in demand
  74. ‘Flexible manufacturing systems (FMS)’ contribute to effective capacity by:
    a) Reducing the number of products a firm can produce
    b) Allowing rapid changeover between different products with minimal downtime, increasing throughput and utilization
    c) Increasing setup time to ensure higher quality
    d) Fixing production capacity at a predetermined level
    Answer: b) Allowing rapid changeover between different products with minimal downtime, increasing throughput and utilization
  75. Which of the following is a key risk associated with a ‘lead capacity strategy’?
    a) Customers being lost to competitors due to insufficient capacity
    b) Excess capacity and underutilization if forecasted demand does not materialize
    c) Higher labor costs due to mandatory overtime
    d) Reduced product quality due to rushed production
    Answer: b) Excess capacity and underutilization if forecasted demand does not materialize
  76. A ‘lag capacity strategy’ carries the risk of:
    a) Overbuilding capacity and straining financial resources
    b) Losing customers and market share if capacity cannot keep up with actual demand
    c) Overstaffing during periods of low demand
    d) Excessive inventory accumulation during demand downturns
    Answer: b) Losing customers and market share if capacity cannot keep up with actual demand
  77. ‘Economies of scope’ differ from economies of scale in that they refer to:
    a) Cost advantages gained by increasing the volume of a single product
    b) Cost advantages gained by producing multiple products together more efficiently than producing them separately
    c) Cost reductions achieved by reducing product variety
    d) Scale advantages achieved by expanding a single facility
    Answer: b) Cost advantages gained by producing multiple products together more efficiently than producing them separately
  78. Which of the following is an external (market-based) strategy to manage capacity shortfalls?
    a) Improving internal process efficiency
    b) Cross-training employees to increase workforce flexibility
    c) Subcontracting excess demand to third-party manufacturers
    d) Installing additional machines on the existing production floor
    Answer: c) Subcontracting excess demand to third-party manufacturers
  79. ‘Revenue management’ (yield management) as a capacity strategy is primarily used in:
    a) Continuous process manufacturing such as oil refining
    b) Industries with fixed capacity and perishable inventory such as airlines, hotels, and rental cars
    c) Mass production of standardized consumer goods
    d) Heavy manufacturing industries such as steel production
    Answer: b) Industries with fixed capacity and perishable inventory such as airlines, hotels, and rental cars
  80. Which of the following industries most commonly uses revenue management to maximize capacity utilization?
    a) Furniture manufacturing
    b) Wheat farming
    c) Commercial airlines
    d) Automobile manufacturing
    Answer: c) Commercial airlines
  81. ‘Net present value (NPV)’ analysis is used in capacity planning to:
    a) Calculate the daily production output of a facility
    b) Evaluate the long-term financial viability of a capacity investment by discounting future cash flows to present value
    c) Measure employee productivity across different shifts
    d) Determine the optimal product mix for a given capacity level
    Answer: b) Evaluate the long-term financial viability of a capacity investment by discounting future cash flows to present value
  82. In a capacity expansion decision, a positive NPV indicates that:
    a) The project will definitely succeed in operational terms
    b) The investment is expected to generate returns greater than the cost of capital and creates value for the organization
    c) The facility will always operate at design capacity
    d) Total revenue will exactly equal total costs over the project life
    Answer: b) The investment is expected to generate returns greater than the cost of capital and creates value for the organization
  83. Which forecasting method is most commonly used as an input to long-range capacity planning?
    a) Moving average
    b) Exponential smoothing
    c) Time series regression and qualitative (judgmental) methods for long-range demand forecasting
    d) Daily production reports
    Answer: c) Time series regression and qualitative (judgmental) methods for long-range demand forecasting
  84. The accuracy of capacity planning is most directly dependent on:
    a) The size of the planning team
    b) The accuracy of demand forecasts used as inputs
    c) The complexity of the production process
    d) The number of suppliers in the supply chain
    Answer: b) The accuracy of demand forecasts used as inputs
  85. Which of the following is a challenge unique to capacity planning in service operations?
    a) Services can always store output as finished goods inventory
    b) Demand variability in services is typically lower than in manufacturing
    c) Customers often participate directly in the service process, making capacity planning more complex
    d) Service capacity decisions have no long-term financial implications
    Answer: c) Customers often participate directly in the service process, making capacity planning more complex
  86. ‘Simulation’ as a capacity planning tool is used to:
    a) Calculate the exact optimal capacity level mathematically
    b) Model complex systems with variability to evaluate how different capacity configurations would perform under various demand scenarios
    c) Replace the need for financial analysis in capacity decisions
    d) Schedule individual employees on production shifts
    Answer: b) Model complex systems with variability to evaluate how different capacity configurations would perform under various demand scenarios
  87. Which of the following is an advantage of expanding capacity in large increments (big steps)?
    a) Lower risk of excess capacity if demand forecasts are incorrect
    b) Economies of scale and lower average cost per unit at the new capacity level
    c) Greater flexibility to scale back if demand fails to materialize
    d) Easier to finance than smaller, incremental expansions
    Answer: b) Economies of scale and lower average cost per unit at the new capacity level
  88. Which of the following is an advantage of expanding capacity in small, incremental steps?
    a) Significant economies of scale in construction and equipment
    b) Lower risk of excess capacity because additions are small and tied more closely to actual demand growth
    c) Faster total capacity build-up than large-increment expansion
    d) Lower per-unit construction costs than large-scale expansion
    Answer: b) Lower risk of excess capacity because additions are small and tied more closely to actual demand growth
  89. ‘Collaboration and sharing’ as a capacity strategy involves:
    a) Building duplicate facilities in every market
    b) Sharing production capacity or resources with other firms to meet demand spikes that neither could handle alone
    c) Reducing the total capacity of a firm to control costs
    d) Eliminating all outsourcing agreements
    Answer: b) Sharing production capacity or resources with other firms to meet demand spikes that neither could handle alone
  90. Which of the following statements about capacity and quality is true?
    a) High capacity utilization always improves product quality
    b) Operating close to maximum capacity often leads to quality problems due to reduced inspection time and worker fatigue
    c) Quality management programs have no impact on effective capacity
    d) Higher quality always requires lower production capacity
    Answer: b) Operating close to maximum capacity often leads to quality problems due to reduced inspection time and worker fatigue
  91. ‘Technology investment’ affects capacity planning by:
    a) Reducing design capacity to more manageable levels
    b) Enabling higher throughput rates, greater automation, and often reducing the labor content per unit — changing the effective capacity of a system
    c) Eliminating the need for capacity cushions
    d) Removing the variability in production processes
    Answer: b) Enabling higher throughput rates, greater automation, and often reducing the labor content per unit — changing the effective capacity of a system
  92. Which of the following correctly describes ‘capacity planning under uncertainty’?
    a) Planners assume that demand forecasts are 100% accurate and build capacity accordingly
    b) Because demand is uncertain, planners use probability analysis, scenario planning, and real options theory to make robust capacity decisions
    c) Uncertainty is not relevant to long-range capacity planning
    d) Capacity under uncertainty is always set at design capacity
    Answer: b) Because demand is uncertain, planners use probability analysis, scenario planning, and real options theory to make robust capacity decisions
  93. ‘Real options analysis’ in capacity planning refers to:
    a) Using historical data to set optimal capacity levels
    b) Valuing the flexibility embedded in capacity decisions — such as the option to expand, contract, or abandon — as financial options
    c) A method for calculating break-even volume for a new facility
    d) A technique for assigning employees to production shifts
    Answer: b) Valuing the flexibility embedded in capacity decisions — such as the option to expand, contract, or abandon — as financial options
  94. Which of the following is a measure used to evaluate the trade-off between capacity investment and demand uncertainty?
    a) Scrap rate
    b) Expected value analysis using decision trees and probability-weighted outcomes
    c) Employee satisfaction index
    d) Defects per million opportunities (DPMO)
    Answer: b) Expected value analysis using decision trees and probability-weighted outcomes
  95. The ‘aggregate capacity plan’ feeds into which of the following more detailed plans?
    a) Strategic business plan
    b) Financial auditing schedule
    c) Master Production Schedule (MPS)
    d) Supplier relationship management (SRM) system
    Answer: c) Master Production Schedule (MPS)
  96. ‘Time fences’ in production planning are related to capacity management because they:
    a) Define the geographic boundaries of a facility
    b) Establish periods within which changes to the production schedule are restricted or controlled to protect capacity commitments and supplier orders
    c) Measure the time between maintenance intervals for equipment
    d) Set the maximum time allowed for employee breaks during shifts
    Answer: b) Establish periods within which changes to the production schedule are restricted or controlled to protect capacity commitments and supplier orders
  97. Which of the following is an example of a ‘capacity cushion’ strategy in healthcare?
    a) Scheduling every hospital bed at full occupancy at all times
    b) Maintaining a small number of unscheduled beds and on-call staff to handle emergency demand surges
    c) Turning away non-emergency patients when at full capacity
    d) Outsourcing all surgical procedures to neighboring hospitals
    Answer: b) Maintaining a small number of unscheduled beds and on-call staff to handle emergency demand surges
  98. Which of the following is the most critical long-term capacity decision for most firms?
    a) The number of overtime hours scheduled per week
    b) The amount of raw material safety stock held
    c) The timing and size of facility expansion or new plant construction investments
    d) The daily scheduling of employees across production shifts
    Answer: c) The timing and size of facility expansion or new plant construction investments
  99. Which of the following factors makes capacity planning in global supply chains more complex than in domestic operations?
    a) Lower demand variability in global markets
    b) Currency fluctuations, geopolitical risk, longer lead times, and varying regulations across countries add significant uncertainty to global capacity decisions
    c) Global supply chains always have higher effective capacity than domestic ones
    d) International trade eliminates the need for local capacity planning
    Answer: b) Currency fluctuations, geopolitical risk, longer lead times, and varying regulations across countries add significant uncertainty to global capacity decisions
  100. Which of the following best summarizes the goal of effective capacity management?
    a) To always operate at 100% of design capacity to minimize unit costs
    b) To maximize design capacity regardless of actual demand patterns
    c) To match the right amount of capacity with demand in a cost-effective and timely manner while maintaining service quality and operational flexibility
    d) To eliminate all variability in production processes through automation
    Answer: c) To match the right amount of capacity with demand in a cost-effective and timely manner while maintaining service quality and operational flexibility
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