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 $

7,017

9,035

14,251

variable cost $/unit

1.05

0.78

0.63

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: 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 $

7,017

9,035

14,251

variable cost $/unit

1.05

0.78

0.63

Explanation / Answer

Firstly let us calculate breakeven level of production/sales for each process and then breakeven points between the processes. As mentioned Q represents the production quantity.

Process 3

By comparing the total costs between Process 1 and Process 2, we get the rule that

a)     the range of annual Q for which Process 1 is best to use is : 0< Q <= 7474

By comparing the total costs between Process 2 and Process 3, we get the rule that

b) the range of annual volume for which Process 2 is best to use is: 7474 < Q <= 34773 and

c) the range of annual volume for which Process 3 is best to use is: Q >= 34774

Description Process 1 Process 2

Process 3

Ann. Fixed Cost $ 7017 9035 14251 Variable cost $/unit 1.05 .78 .63 Total cost for Q 7017+1.05Q 9035+.78Q 14251+.63Q Optimal Q <= 7474 7474 < Q < 34774 Q > 34773

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