Borges Machine Shop, Inc., has a 1-year contract for the production of 250,000 g

Question

Borges Machine Shop, Inc., has a 1-year contract for the production of 250,000 gear housings for a new off-road vehicle. Owner Luis Borges hopes the contract will be extended and the volume increased next year. Borges has developed costs for three alternatives. They are general-purpose equipment (GPE), flexible manufacturing system (FMS), and expensive, but efficient, dedicated machine (DM). The cost data follow: Annual contracted units Annual fixed cost Per unit variable cost Equipment (GPE 250,000 $100,000 $15.00 System (FMS) 250,000 S250,000 $14.00 Dedicated Machine (DM) 250,000 $480,000 $13.00 The option GPE is best when the contracted volume is below 150000 units (enter your response as a whole number) The option FMS is best when the contracted volume is between andunits (enter your responses as whole numbers).

Explanation / Answer

Total cost = Fixed cost + Number of units*Variable cost

GPE = 100,000 + 15*x

FMS = 250,000 + 14*x

DM = 480,000 + 13*x

GPE is best till the point cost is equal to FMS. Hence the point is:

100,000 + 15*x = 250,000 + 14*x

x = 150,000 units

The point up to which FMS is best is from 150,000 till the point the cost becomes equal to DM

250,000 + 14*x = 480,000 + 13*x

x = 230,000

So, the FMS is best from 150,000 to 230,000 units

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