Borges Machine Shop, Inc., has a 1-year contract for the production of 75,000 ge
ID: 461798 • Letter: B
Question
Borges Machine Shop, Inc., has a 1-year contract for the production of 75,000 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: Based on the total cost, the process that is best suited for the current contracted volume is FMS. Suppose the contracted volume changes to 275,000 gear housings. Based on the total cost, the process that is best suited for the new volume isExplanation / Answer
The total cost calculation for each process based on contact value 75,000 units
Total cost for general- purpose equipment (GPE) = Fixed cost + Variable cost * number of units
= $ 125,000 + $ 18 * 75,000
= $ 125,000 + $ 1,350,000 = $ 1,475,000
Total cost for Flexible manufacturing system (FMS) = Fixed cost + Variable cost * number of units
= $ 250,000 + $ 14 * 75,000
= $ 250,000 + $ 1,050,000 = $ 1,300,000
Total cost for Dedicated Machine (DM) = Fixed cost + Variable cost * number of units
= $ 525,000 + $ 13.75 * 75,000
= $ 525,000 + $ 1,031,250 = $ 1,556,250
For the current contract value the best suited process is Flexible manufacturing system (FMS) as the total cost is lowest for this process.
The total cost calculation for each process based on contact value 275,000 units
Total cost for general- purpose equipment (GPE) = Fixed cost + Variable cost * number of units
= $ 125,000 + $ 18 * 275,000
= $ 125,000 + $ 4,950,000 = $ 5,075,000
Total cost for Flexible manufacturing system (FMS) = Fixed cost + Variable cost * number of units
= $ 250,000 + $ 14 *275,000
= $ 250,000 + $ 3,850,000 = $ 4,100,000
Total cost for Dedicated Machine (DM) = Fixed cost + Variable cost * number of units
= $ 525,000 + $ 13.75 *275,000
= $ 525,000 + $ 3,781,250 = $ 4,306,250
For the new contract value 275,00 units, the best suited process is Flexible manufacturing system (FMS) as the total cost is lowest for this process.
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