Perry Equipment & Association Inc has 1 year contract for the production of 200,

Question

Perry Equipment & Association Inc has 1 year contract for the production of 200,000 gear housings for a new off-road vehicle. Owner Adam Perry hopes the contract will be extended and the volume increased next year. Perry 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 follows:

GPE FMS DM

Annual fixed cost ($) 100,000 200,000 500,000

Per Unit Variable cost ($) 20 19 18

a. Under which production range is each process appropriate?

b. Which process is best for this contract?

c. Does your decision change if the per unit variable cost for DM increase to $21?

d. Determine the best process for each of the following volumes: (i) 75,000; (ii) 275,000 (iii) 375,000

e. If a contract for the second and third years is pending what are the implications for process selection?

Explanation / Answer

a)
So we need to set them equal

100000+20x=200000+19x
x = 100000
so from 0 to 100,000 units we choose GPE.

200,000+19x=500,000+18x
300,000=x

so from 100,000 to 300,000 we choose FMS

for >300,000 we choose DM.

b) it's in the middle range so FMS

c) no. that would raise the cost of an alternative. If it's the cheapest now, raising an alternative doesn't change anything.

d) GPE, FMS, DM

e) doesn't matter, unless there is a high cost of switching processes. Then I would see what ranges they fall into.

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