7.5 Meile Machine Shop, Inc., has a 1-year contract for the production of 200,00

Question

7.5 Meile Machine Shop, Inc., has a 1-year contract for the production of 200,000 gear housings for a new off-road vehicle. Owner Larry Meile hopes the contract will be extended and the volume increased next year. Meile has developed costs for three alternatives. They are general-purpose equipment (GPE), flexible manufacturing system (FMS), and expensive, but efficient, dedicated machine (DM). The cost data follow: General Flexible Purpose Manufacturing Dedicated Equipment System Machine (GPE) (FMS) (DM) Annual contracted units 200,000 200,000 200,000 Annual fixed cost $100,000 $200,000 $500,000 Per unit variable cost $15.00 $14.00 $13.00 Which process is best for this contract?

Explanation / Answer

For 200,000 units produced, the functions are as follows For GPE, the cost is C = 100000 +15*200,000=$3,100,000 For FMS, the cost is C = 200000 + 14*200,000=$3,000,000 For DM, the cost is C = 500000 + 13*200,000.=$3,100,000 So, the best and cheapest is FMS.

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