A producer of pottery is considering the addition of a new plant to absorb the b

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 $

6,125

9,878

3,871

variable cost $/unit

0.68

0.54

1.18

The producer wants you to help them to identify at what range of production Q (quantity) is Best to adopt Process 1, Process 2, and Process 3.

Note: To sepcify annual Q range, use 1234 < Q <= 5678.

Questions:
a) The range of annual Q for which Process 1 is best to use is: Blank 1

b) The range of annual volume for which Process 2 is best to use is: Blank 2

c) The range of annual volume for which Process 3 is best to use is: Blank 3

Process 1

Process 2

Process 3

Ann. Fixed Cost $

6,125

9,878

3,871

variable cost $/unit

0.68

0.54

1.18

Explanation / Answer

Process 1: fixed cost = 6125 and variable cost = 0.68

Process 2: fixed cost = 9878 and variable cost = 0.54

Process 3: fixed cost = 3871 and variable cost = 1.18

let the quantity be 0 - 1,000 units.

I do an excel simulation starting from Q = 0 to determine the situation where each process offers the lowest cost. Total cost for a process = fixed costs+Q*variable costs

we find that at 4508 units, process 1 and process 3 gives the same total cost.

This extends upto 26,807 units when it has the lowest cost.

Thus range for process 1: 4508<Q<=26807

b. Process 2 is best to use when volume is greater than 26807 units i.e from 26808 units

range = 26807<Q

c. Process 3 is best for 0 to 4508 units.

Calculations for 4508 units have been shown above. So range for process 3: 0<Q<=4508

Q 4508 Process 1 Fixed Cost 6125 6125 Variable cost 0.68 3065.44 Total cost 9190.44 Process 2 Fixed Cost 9878 9878 Variable cost 0.54 2434.32 Total cost 12312.32 Process 3 Fixed Cost 3871 3871 Variable cost 1.18 5319.44 Total cost 9190.44

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