Assignment:
Borges Machine Shop, Inc., has a 1-year contract for the production of 200,000 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 altematives. They are general-purpose equipment (GPE), flexible manufacturing system (FMS), and expensive, but efficient, dedicated machine (DM).
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General-purchase Equipment
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Flexible manufacturing system (FMS)
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Dedicated Machine (DM)
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Annual Contracted Units
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2,00,000
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2,00,000
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2,00,000
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Annual Fixed Cost
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$1,50,000
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$2,25,000
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$5,00,000
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Per unit variable cost
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$16.00
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$14.00
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$13.00
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If the contract for the second and third years is pending, for demand below 37,500 units, option is the best alternative for Luis.