Question

Borges Machine​ Shop, Inc., has a​ 1-year contract for the production of 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: ​General-Purpose Equipment​ (GPE) Flexible Manufacturing System​ (FMS) Dedicated Machine​ (DM) Annual contracted units Annual fixed cost Per unit variable cost Based on the​ cost, the process that is best suited for the current contracted volume is __________.

Answer 1

All the numbers are missing, so I looked for a similar question.

The contract includes the production of 225,000 gear housings during 1 year.

We are also given the estimated costs of each alternative. We must choose the alternative that minimizes our total costs.

• total costs for general purpose equipment (GPE) = $125,000 + (225,000 x $15) = $3,500,000
• total costs for flexible manufacturing system (FMS) = $200,000 + (225,000 x $14.50) = $3,462,500
• total costs for dedicated machine (DM) = $525,000 + (225,000 x $13.50) = $3,562,500

For the current volume, the best option is flexible manufacturing system with a total cost of $3,462,500.

As total volume increases, the DM option becomes more attractive, but in order for it to cost less than FMS, total output should be higher than 325,000 units per year.

525,000 + 13.5x = 200,000 + 14.5x

x = 325,000 units

GPE is only attractive when the total units are lower (below 150,000 units per year):

125,000 + 15x = 200,000 + 14.5x

0.5x = 75,000

x = 150,000