A company that produces pleasure boats has decided to expand one of its lines. C

Question

A company that produces pleasure boats has decided to expand one of its lines. Current facilities are insufficient to handle the increased workload, so the company is considering three alternatives, A (new location), B (subcontract), and C (expand existing facilities).

       Alternative A would involve substantial fixed costs but relatively low variable costs: fixed costs would be $275,000 per year, and variable costs would be $520 per boat. Subcontracting would involve a cost per boat of $2,560, and expansion would require an annual fixed cost of $60,000 and a variable cost of $1,060 per boat.

Find the range of output for each alternative that would yield the lowest total cost. (Leave no cells blank - be certain to enter "0" wherever required. Round your answers to the nearest whole number.)

A company that produces pleasure boats has decided to expand one of its lines. Current facilities are insufficient to handle the increased workload, so the company is considering three alternatives, A (new location), B (subcontract), and C (expand existing facilities).

       Alternative A would involve substantial fixed costs but relatively low variable costs: fixed costs would be $275,000 per year, and variable costs would be $520 per boat. Subcontracting would involve a cost per boat of $2,560, and expansion would require an annual fixed cost of $60,000 and a variable cost of $1,060 per boat.

Explanation / Answer

Given Information

About the alternatives:

A –

Fixed cost (FC) = $ 275000/ yr

Variable cost (VC) = $ 520 per boat

B –

Sub contracting cost = $ 2560 per boat

C –

Fixed cost (FC) = $ 60000/ yr

Variable cost (VC) = $ 1060 per boat

To find out the range of output

Find out the point of intersection of any two alternatives by equating the total cost.

TC (A) = TC (B)

275000 + 520 Q = 2560 Q

Q = 135 and cost at this point = $ 345600

TC (B) = TC (C)

2560 Q = 60000 + 1060 Q

Q = 40 and cost = $ 102400

TC (A) = TC (C)

275000 + 520 Q = 60000 + 1060 Q

Q = 398 and cost = 481880

Now with the help of Cross over charts,

The range is

0 -40 volume = Alternative B

40 – 398 Volume = Alternative C

More than 398 volume = Alternative A

(b) Which alternative will result min cost at 210 volume

TC (A) = 275000 + 520 X 210 = $ 384200

TC (B) = 2560 X 210 = $537600

TC © = 60000 + 1060 X 210 = $282600

Alternative C will result minimum cost.

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