A producer of pottery is considering the addition of a new plant to absorb the b
ID: 443769 • Letter: A
Question
A producer of pottery is considering the addition of a new plant to absorb the backlog of demand that now exists. The primary location being considered will have the following cost structures as shown in the table. The producer knows there is a big order or order contract that will be awarded by the giant retail WalWal. The producer is not certain as what capacity production is to produce. It all depends on WalWal’s contract. The producer has also been informed, the first batch of pottery is required to ship in a very tight time frame from the first production run. The producer decides to plan ahead and select the best production process to set up for manufacturing.
Process 1
Process 2
Process 3
Ann. Fixed Cost $
5,834
3,821
11,099
variable cost $/unit
0.62
0.81
0.47
The producer wants you to help them to identify at what range of production quantity (Q) for Process 1, Process 2, and Process 3 is best to adopt.
Enter Q range with whole number and use signs such as <= and >= to describe greater or less than equal to. Ex. 1234 < Q <= 5678
a) The range of annual Q for which Process 1 is best to use is:
b) The range of annual volume for which Process 2 is best to use is:
c) The range of annual volume for which Process 3 is best to use is:
Process 1
Process 2
Process 3
Ann. Fixed Cost $
5,834
3,821
11,099
variable cost $/unit
0.62
0.81
0.47
Explanation / Answer
Point of indifference between Process 1 and Process 2
5834 + 0.62Q = 3821 + 0.81Q
Q = 10595
Point of indifference between Process 2 and Process 3
3821 + 0.81Q = 11099 + 0.47Q
Q = 21406
Point of indifference between Process 1 and Process 3
5834 + 0.62Q = 11099 + 0.47Q
Q = 35100
Total Cost Process 2
Total Cost = Fixed Cost + (Variable Cost * Quantity)
Comparing the total cost we get:
a) The range of annual Q for which Process 1 is best to use is: 10,595 <= Q <=35100
b) The range of annual volume for which Process 2 is best to use is: Q <= 10595
c) The range of annual volume for which Process 3 is best to use is: Q >=35100
Total Cost Process 2
Total Cost Process 3 5,000 8934 7871 13449 10,000 12034 11921 15799 10,595 12403 12403 16079 20,000 18234 20021 20499 21,406 19106 21160 21160 30,000 24434 28121 25199 35,000 27534 32171 27549 35,100 27596 32252 27596 40,000 30634 36221 29899Related Questions
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