In order to benefit from a forecast of rising demand, Hudson Hardware is conside

Question

In order to benefit from a forecast of rising demand, Hudson Hardware is considering how to increase their capacity. There are three choices: they can open a new manufacturing plant (A), outsource some of their production (B), or expand their current factory (C). The fixed and variable costs for the three alternatives are as follows: A: fixed cost $265,000 per year, variable costs be $620 per order B: no fixed costs, variable cost $2,520 per order C: fixed cost $57,000 per year, variable cost $1,050 per order a. For each option (A,B,C), what is the range with the lowest cost? (Round up or down to the closest integer.) A or more B to C to b. If the yearly sales were 230, which would be the lowest-cost option? A B C

Explanation / Answer

option A - Fixed cost = $265,000 variable cost = $620

option B - Fixed cost = 0    variable cost = $2520

option C- Fixed cost = $57,000 variable cost = $1050

The total cost of the three options are:
At Total cost = Fixed cost + Variable cost for a volume “X”
option 1=> Total cost = 265000 + 620× X
option 2=> Total cost =0         + 2520× X
option 3=>Total cost = 57000 + 1050× X

We can compute and plot the total costs per annum for the 3 different options for the various cases of
production volume o 100 200 500 1000

option 1          -   option 2      -    option 3

100 - 327000   -   252000      - 162000

200- 389000    -   504000      -   267000

500- 575000    - 1260000       -582000

1000-890000    - 2520000    - 1107000

Hence for upto 40 items optio 2 will be good

for upto 450 option 3 will better option

for more than 400 option should be choosen.

Hence if yearly sales are 230 option 3 should be choosen

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