Question

Borges Machine Shop, Inc., has a 1-year contract for the production of 225.000 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 (DML The cost data follow: Annual contracted units Annual fixed cost Per unit variable cost General Purpose Equipment (GPE) 225,000 $150,000 $18.00 Flexible Manufacturing System (FMS) 225,000 $250,000 $14.00 Dedicated Machine (DM) 225.000 $525.000 $13.00 The option GPE is best when the contracted volume is below units (enter your response as a whole number). The option FMS is best when the contracted volume is between and units (enter your responses as whole numbers) The option DM is best when the contracted volume is over units (eviter your response as a whole number)

Answer 1

Below 25000 units - GPE

25001- 275000 units - FMS

275000+ - DM

	GPE	FMS	DM
Fixed cost	$                               150000.00	$    2,0,000.00	$             525,000.00
Variable Cost	$                                           18.00	$                14.00	$                         13.00
Total units	225000	225000	225000
Cost of contract	$                            4200000.00	$ 3400000.00	$           3450000.00	FMS most economical for 225000
Most economical volume (Refer below)	0 - 25000	25001-275000	275000 and beyond

Breakeven units for GPE & DM i.e. when cost of GPE = Cost of DM	`= Difference of fixed costs / Difference in variable cost	75000	If the contract is beyond 75000 units Choose DM
Breakeven units for GPE & FMS i.e. when cost of GPE = Cost of FMS	`= Difference of fixed costs / Difference in variable cost	25000	If the contract is greater than 25000 then choose FMS, below than 25000 choose GPE
Breakeven units for FMS & DM i.e. when cost of FMS = Cost of DM	`= Difference of fixed costs / Difference in variable cost	275000	Choose DM when the contract is greater than 275000, otherwise Choose FMS