3.1 A company that produces pleasure boats has decided to expand one of its line
ID: 407871 • Letter: 3
Question
3.1
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).
Alternative A would involve substantial fixed costs but relatively low variable costs: fixed costs would be $315,300 per year, and variable costs would be $900 per boat. Subcontracting would involve a cost per boat of $2,100 and a fixed cost of $26,000, and expansion would require an annual fixed cost of $141,000 and a variable cost of $1,100 per boat.
Expansion would result in an increase of $83,000 per year in transportation costs, subcontracting would result in an increase of $26,000 per year, and adding a new location would result in an increase of $5,300 per year.
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).
Alternative A would involve substantial fixed costs but relatively low variable costs: fixed costs would be $315,300 per year, and variable costs would be $900 per boat. Subcontracting would involve a cost per boat of $2,100 and a fixed cost of $26,000, and expansion would require an annual fixed cost of $141,000 and a variable cost of $1,100 per boat.
Expansion would result in an increase of $83,000 per year in transportation costs, subcontracting would result in an increase of $26,000 per year, and adding a new location would result in an increase of $5,300 per year.
Explanation / Answer
Option B - Subcontracting
Total Expected annual Volume of Boats 138 Option A: Fixed Cost (FC) 315300 Variable Cost/Boat 900 Total Variable Cost (900 * 138) (VC) 124200 Transportation Cost (TC) 5300 Total Cost (FC + VC + TC) 444800 Option B: Cost/Boat 2100 Total Variable Cost (VC) (2100 * 138) 289800 Total Fixed Cost (FC) 26000 Transportation Cost (TC) 26000 Total Cost (FC + VC + TC) 341800 Option C: Fixed Cost (FC) 141000 Variable Cost/Boat 1100 Total Variable Cost (VC) (1100 * 138) 151800 Transportation Cost (TC) 83000 Total Cost (FC + VC + TC) 375800Related Questions
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