Question

A company that produces pleasure boats has decided to expand one of its lines. Current facilities are insufficient to handle the increased workload, so the company is considering three alternatives, A (new location), B (subcontract), and C (expand existing facilities). Alternative A would involve substantial fixed costs but relatively low variable costs: fixed costs would be $250,000 per year, and variable costs would be $700 per boat. Subcontracting would involve a cost per boat of $3,100, and expansion would require an annual fixed cost of $60,000 and a variable cost of $1,700 per boat. Expansion would result in an increase of $81,000 per year in transportation costs, sub-contracting would result in an increase of $28,000 per year, and adding a new location would result in an increase of $5,200 per year.

1. Find the range of output for each alternative that would yield the lowest total cost.
A. 315,550 or more.
B. 2,550 or 306,000.
c. 57,050 or 182,000.
2. Which alternative would yield the lowest total cost for an expected annual volume of 115 boats?
A. A.
B. B.
C. C.

Answer 1

315,550 or more.

Step-by-step explanation:

Answer 2

1. A. 315,550 or more

2. B. B

Step-by-step explanation:

Number of boats is 115

Alternative A :

New location cost are

Fixed cost $250,000

Transportation cost increase is $5200

Variable cost is $700 per boat

Total cost per boat is (250,000 + 5200 ) / 115 + 700 = 2,919 per boat.

Alternative B :

Subcontract costs are

Transportation cost increase is $28,000

cost per boat is $3,100 per boat

Total cost per boat is 28,000 / 115 + 3,100 = 3,343 per boat.

Alternative C :

New location cost are

Fixed cost $60,000

Transportation cost increase is $81,000

Variable cost is $1,700 per boat

Total cost per boat is (60,000 + 81,000 ) / 115 + 1,700 = 2,926 per boat.

Best alternative is A ( New Location ) which results in lowest total cost per boat.