Keisler Enterprise is considering the option of adding a line for producing a sp
ID: 2641571 • Letter: K
Question
Keisler Enterprise is considering the option of adding a line for producing a special onion flavored tofu over the next year. In fact, there are two ways to do this. The first way is using spare capacity on an existing line and modifying the process by hand. The second is to set up a brand new line. It would cost $5,000 to set up the existing line after which each pound of onion tofu would cost $1 to produce, up to maximum of 15,000 units. It would cost $10,000 to set up a brand new line after which each pound of onion tofu would cost $0.50 (up to maximum of 25,000 units) to produce up to the point of sale. The onion tofu will be sold at $2 . If the onion tofu is unpopular, it will only sell 8,000 units. If its somewhat popular, it will sell 15,000 units. If its very popular it will sell 24,000 units. There is a 10% chance the product will be very popular, a 50% chance it will be somewhat popular and a 40% chance it will be unpopular. Should KE add no line at all, should they use spare capacity or should they set up a brand new line?
Explanation / Answer
Adding the chances of popular, somewhat popular and unpopular in proportion to the units produced we will get the probable selling units = .1*24000+.5*15000+.4*8000 = 13,100 units
Costs under 1st option = 5,000+13,100*1 = 18,100
Costs under 2nd option = 10,000+13,100*.5 = 16,550
Thus keeping the present scenario in mind the company should opt for 2nd option i.e. set up a brand new line.
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