Question

Use a graph as part of your analysis. A company that produces pleasure boats has decided to expand one of its lines. The current facility is insufficient to handle the increased workload, so the company is considering three alternatives: A (new location), B (subcontract), or C (expand existing facility). Alternative A would involve substantial fixed cost but relatively low variable cost: fixed cost would be $250,000 per year and variable cost would be $500 per boat. Subcontracting would involve a cost per boat of $2,500, and expansion would require an annual fixed cost of $50,000 and a variable cost of $1,000 per boat. Find the range of output for each alternative that would yield the lowest total cost.

Answer 1

To determine the most cost-effective production strategy (new location, subcontract, or expand) for various output levels of a boat company, one must consider both fixed and variable costs, and analyze the total cost curves for each alternative. The cost-effective range for each option will depend on their specific fixed and variable costs along with the intersection points of the total cost curves.

Step-by-step explanation:

The scenario involves analyzing the total costs of three alternative production strategies for a company producing pleasure boats: establishing a new location (A), subcontracting production (B), and expanding the existing facility (C).

To find the range of output that would yield the lowest total cost for each alternative, we must consider both fixed and variable costs. Alternative A has a high fixed cost but low variable cost per boat, Alternative B has no fixed cost but a high variable cost per boat, and Alternative C has a moderate fixed cost and variable cost per boat.

By plotting total cost curves for each alternative based on different levels of output, we can visualize the point at which each alternative becomes most cost-effective. At low levels of output, the alternative with the lowest fixed costs will generally have the lowest total cost, but as the level of output increases, the alternative with the lowest variable costs can become more economical, despite higher fixed costs.

The intersection points of these total cost curves determine the output ranges where each alternative is most cost-effective. To provide the exact output ranges, a calculation and graphing of each alternative's total cost function is required, taking into account their respective fixed and variable costs.