Module 3 [Ch 8-10 6 Saved Problem 8-4 A company that produces pleasure boats has

Question

Module 3 [Ch 8-10 6 Saved Problem 8-4 A company that produces pleasure boats has decided to expand one of its lines. Current facilities are insufficient to handle the increased workload, so the company is considering three alternatives, A (new location), B (subcontract), and C (expand existing facilities). 6.66 points Alternative A would involve substantial fixed costs but relatively low variable costs: fixed costs would be $265,000 per year, and variable costs would be $520 per boat Subcontracting would involve a cost per boat of $2.610, and expansion would require an Hint annual fixed cost of $59,000 and a variable cost of $1.040 per boat a. Find the range of output for each alternative that would yield the lowest total cost (Leave no cells blank be certain to enter "o" wherever required. Round your answers to the nearest whole number.) or to to more b. Which alternative would yield the lowest total cost for an expected annual volume of 290 boats? K Prey 8 of 15 EE Next> archive (a.zip ib archivo zap

Explanation / Answer

At lower numbers it is better to subcontract the boats.

Let's assume that n is the number where cost of subconracting and expansion become same

i.e 59000+1040n =2610n

n=37.57 , which means that at 38 or more quantity Option C will be useful.

Let's assume that at quantity n' option A will be more economical

i.e. 265000+520n' = 59000+1040n'

which gives n= 396.15  

Which means that any number beyond 397, process A will be more economical.

Hence

A- 397 or more

B- 1 to 37

C - 38 to 396

b. For 290 boats option C will be more economical. However, as it is not an option, the next best option is A, which will be economical than B.

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