Borges Machine Shop, Inc., has a 1-year contract for the production of 200,000 g

Question

Borges Machine Shop, Inc., has a 1-year contract for the production of 200,000 gear housings for a new off-road vehicle. Owner Luis Borges hopes the contract will be extended and the volume increased next year. Borges has developed costs for three alternatives. They are general-purpose equipment (GPE), flexible manufacturing system (FMS), and expensive, but efficient, dedicated machine (DM). The cost data follow: General-Purpose Flexible Manufacturing Equipment (GPE) 200,000 $150,000 $16.00 System (FMS) 200,000 S225,000 $14.00 Machine (DM) Annual contracted units Annual fixed cost Per unit variable cost 200,000 $525,000 $13.00 The option GPE is best when the contracted volume is below units (enter your response as a whole number) The option FMS is best when the contracted volume is between and units (enter your responses as whole numbers) The option DM is best when the contracted volume is overunits (enter your response as a whole number)

Explanation / Answer

We know total cost TC = Fixed cost +(Unit variable cost*No of units)

GPE TC = 150000+16Q

FMS TC = 225000 + 14Q

DM TC = 525000 + 13Q

By equalling the total cost we will get indifference point . From that we can say the ranges.

GPE TC = FMS TC

150000+16Q = 225000 + 14Q

Q = 37500

FMS TC = DM TC

225000 + 14Q = 525000 + 13Q

Q = 300000

DM TC = GPE TC

525000 + 13Q=150000+16Q

Q = 125000

From this I can say

GPE is best below 37500 units

FMS is best between 37500 and 300000 units

DM is best above 300000 units

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