Meile Machine Shop, Inc., has a 1-year contract for the production of
250,000
gear housings for a new off-road vehicle. Owner Larry Meile hopes the contract will be extended and the volume increased next year. Meile has developed costs for three alternatives. They are general-purpose equipment (GPE), flexible manufacturing system (FMS)
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, 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 |
250,000 |
250,000 |
250,000 |
Annual fixed cost |
$150,000 |
$225,000 |
$525,000 |
Per unit variable cost |
$16.00 |
$14.75 |
$13.00 |
Based on the cost, the process that is best suited for the current contracted volume is
▼
DM
FMS
GPE
.
INDIFFERENCE POINT = (FIXED COST A - FIXED COST B) / (VARIABLE COST B - VARIABLE COST A)
FC A = 150000
VC A = 16
FC B = 225000
VC B = 14.75
FC C = 525000
VC C = 13
INDIFFERENCE POINT FROM A TO B RANGE = (150000 - 225000) / (14.75 -
16) = 60000
INDIFFERENCE POINT FROM B TO C RANGE = (225000 - 525000) / (13 - 14.75) = 171429
WE WILL CHOOSE DM FOR 250000 UNITS BECAUSE IT HAS A LOWER VARIABLE COST PER UNIT.
Meile Machine Shop, Inc., has a 1-year contract for the production of 250,000 gear housings for...
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