A firm is about to undertake the manufacturing of a product, and is weighing thr

Question

A firm is about to undertake the manufacturing of a product, and is weighing three capacity alternatives: small job shop, large job shop, and repetitive manufacturing plant. The small job shop has fixed costs of $3,000 per month, and variable costs of $10 per unit. The larger job shop has fixed costs of $12,000 per month and variable costs of $4 per unit. The repetitive manufacturing plant has fixed costs of $24,000 and variable costs of $2 per unit.

a) Which alternative should the firm choose if the demand for the product is expected to be 4,200 units per month?

b) Identify the demand ranges where each capacity choice should the firm make.

Explanation / Answer

cost for 4200 units :

small job = 3000 +10x = 45000

larger job = 12000 + 4x = 16800+12000 = 28800

repetitive = 24000 + 2x = 24000 + 8400 = 32400

best option is larger job, since it has minimum cost

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