The KMP Metal Machining Company produces widgets according to customer order. Th
ID: 400353 • Letter: T
Question
The KMP Metal Machining Company produces widgets according to customer order. The company has determined that widgets can be p widget production cost reveals the following data on three different machine tools: M1, M2, or M3. An analysis of Machine Tool Fixed Cost/Order Variable Cost/Unit M1 M2 M3 $300 $760 $490 $8.94 $2.98 $5.29 Click here to access the TVM Factor Table Calculator Determine the most economical machine tool to use for all order sizes between 1 and 200 units. (Hint: Determine the subranges within the overall range of 1 to 200 for which each machine tool is preferred.) Range 1: From units to units Machine Tool for Range 1? Range 2: From units to units Machine Tool for Range 2? Range 3: Machine Tool for Range 3? units or moreExplanation / Answer
M1 has the lowest Fixed cost, followed by M3 and M2. Therefore, these are used in the same order for subranges.
Upper limit of range for M1 (or crossover point between M1 and M3) = (490-300)/(8.94-5.29) = 52
Upper limit of range for M3 (or crossover point between M3 and M2) = (760-490)/(5.29-2.98) = 117
Range 1: From 0 units to 52 units
Machine Tool for Range 1 = M1
Range 2: From 52 units to 117 units
Machine Tool for Range 2 = M3
Range 3: From 117 units or more
Machine Tool for Range 3 = M2
For an order sie of 75, which machine tool should be used: M3
Refer the above ranges, 75 lies in the ranger from 52 to 117. So M3 should be used for this quantity.
Total production cost = 490+5.29*75 = $ 887
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For an order sie of 160, the preferred machine is : M2
Refer the above ranges, 160 lies in the ranger from 117 or more. So M2 should be used for this quantity.
Total production cost for using M2 = 760+2.98*160 = $ 1236.80
However, second more economical machine is M3 and third is M1
Total production cost for using M2 = 490+5.29*160 = 1336.40
Penalty for using M3 (second most economical machine) = 1336.40 - 1236.80 = $ 99.6 ~ $ 100
Total production cost for using M1 = 300+8.94*160 = 1730.40
Penalty for using M3 (The third most economical machine) = 1730.40 - 1236.80 = $ 493.6 ~ $ 494
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