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. The producer wants you to help them to identify at what range of production quantity (Q) for Process l, Process 2, and Process 3 is best to adopt. Enter Q range with whole number and use signs such as = to describe greater or less than equal to. Ex. 1234

Explanation / Answer

Point of Indifference between process 1 and process

9835 + 0.76Q = 15681 + 0.61Q

Q = 38,973

Point of indifference between Process 2 and Process 3

15681 + 0.61Q = 6589 + 1.15Q

Q = 16,837

Point of indifference between Process 1 and Process 3

9835 + 0.76Q = 6589 + 1.15Q

Q = 8323

(a) The range of annual Q for which process 1 best to use : 8323 <= Q <=38973

(b) The range of annual Q for which process 2 best to use : Q >=38973

(c)  The range of annual Q for which process 3 best to use : Q <= 8323

Comparing the total cost we get best process to use.

Total Cost = Fixed Cost + (Variable Cost * Quantity)

Quantity Total Cost (Process1) Total Cost (Process 2) Total Cost (Proces 3) 5000 13635 18731 12339 8323 16160 20758 16160 9000 16675 21171 16939 16837 22631 25952 25952 20000 25035 27881 29589 38973 39455 39455 51408 40,000 40235 40081 52589

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