Question

Part B. Amazon forecasts the following demand for a product (in thousands of units) over the next five years.
Year 1 2 3 4 5
Forecast demand 54 57 61 63 66
The company outsources its manufacturing to Chip manufacturing. Chip has six machines that operate on a two-shift (8 hours each) basis. Fifteen days per year are available for scheduled maintenance of equipment with no process output. Assume there are 240 workdays in a year. Each manufactured good takes 22 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.)
c. Does the firm need to buy more machines? If so, how many? When? If not, justify.

Answer 1

As per the information available :

1. Shift hours : 2*8=16 hours each day

2. Each good produced in 22 minutes or 22/60 hour

3. No. of machines = 6

a) Total production capacity ( per day ) = Daily capacity hours / time taken by each unit = 16*6 /22/60= 5760/22 =261.81

Per year capacity = 261.81 *(240-15) = 58909

b) Demand to capacity ratio for five years:

year demand Capacity demand to capacity

1 54000 58909 .916

2 57000 58909 0.967

3 61000 58909 1.035

4 63000 58909 1.069

5 66000 58909 1.120

So over and above the capacity of 58909 will be able to meet demand beyond 2 years.

c) The company need to buy new machine beyond 2 years as the forecasted demand is continuously rising , raising the demand to output ratio so in order to meet the forecasted demand , firm must increase its capacity by employing more machines.