Question

A manufacturer estimates that a new pizza oven will set 3 to 5 units in the first year, 10 to 20 units in the second year, 20 to 50 units in the third year, and 50 units per year thereafter. Sales are brisk after introduction, with 10 units being distributed by the end of the first year. What should the manufacturer do to estimate production requirements for the second year?

A. Use simple moving average to estimate 10 units, the same as the first-year distribution
B. Maintain the original estimate for the second year 10 to 20 units
C. Establish a test market in a location that represents the overall market
D. Use a weighted moving average to estimate 20 to 40 units, double the second-year estimate

Answer 1

The manufacturer should maintain the original estimate of 10 to 20 units for the second year, as first-year sales match the forecast. Considering economies of scale, the manufacturer should balance production volume with cost efficiency, similar to how Plants L and V maintain their cost advantages at higher production volumes.

Step-by-step explanation:

To estimate production requirements for the second year, the manufacturer should consider maintaining the original estimate of 10 to 20 units for the second year. This is informed by the actual sales being in line with the earlier prediction for the first year, with a distribution of 10 units. While using forecasting methods like a simple moving average or a weighted moving average could provide insights, these methods would require additional data beyond the first year sales to accurately predict future demand.

Economies of scale are relevant to this scenario as managing production costs while scaling up production is crucial for the manufacturer to remain competitive. Production volume increases beyond a certain point (quantity of production at 150 units), the average cost of production plateaus, indicating no further cost advantage despite the increase in production volume.

Considering the concept of economies of scale can help the manufacturer decide on the best production volume that balances the demand forecast and the cost of production, thereby optimizing the production plant efficiency. Plants L and V showcase effective cost management while increasing production, which could serve as a benchmark for the pizza oven manufacturer's production strategy.