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 $295,000 per year, and variable costs would be $590 per boat. Subcontracting would involve a cost per boat of $2,550, and expansion would require an annual fixed cost of $51,000 and a variable cost of $1,080 per boat. a. Find the range of output for each alternative that would yield the lowest total cost. (Leave no cells blank - be certain to enter "0" wherever required. Round your answers to the nearest whole number.) A or more B с to to b. Which alternative would yield the lowest total cost for an expected annual volume of 260 boats? A ООО B

Answer 1

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Fixed Cost = Fixed cost + Variable cost

Let quantity of boats for each alternative = Q

For ALTERNATIVE A (NEW LOCATION):

Fixed cost = $ 295,000

Variable cost per boat = $ 590

Total variable cost = 590Q

Total cost = $ 295,000 + 590Q

FOR ALTERNATIVE 2 (SUBCONTRACT):

Fixed cost = $ 0

Variable cost per boat = $ 2,550

Total variable cost = 2,550Q

Total cost = 0 + 2550Q

FOR ALTERNATIVE 3 (EXPAND):

Fixed cost = $ 51,000

Variable cost per boat = $ 1080

Total variable cost = 1080Q

Total cost = 51,000 + 1080Q

AT POINT OF INDIFFERENCE OF ALTERNATIVE 2 AND ALTERNATIVE 3:

Total cost for Alternative 2 = Total cost of Alternative 3

2550Q = 51000 + 1080Q

1470Q = 51000

Q = 35 units (rounded off)

AT POINT OF INDIFFERENCE OF ALTERNATIVE 3 AND ALTERNATIVE 1:

Total cost for Alternative 2 = Total cost of Alternative 3

51000 + 1080Q = 295,000 + 590Q

490Q = 244,000

Q = 498 units (rounded off)

Therefore,

	From	To
A	498	more
B	0	35
C	35	498