In 1986, John Deere was building a capital intensive factory to produce large, four-wheel-drive farm tractors. Then the price of wheat dropped dramatically, reducing demand for these tractors because they are used extensively for harvesting wheat. John Deere stopped construction of its own factory and attempted to purchase Versatile, a Canadian company that assembled tractors in a garage using off-the-shelf components. We can characterize John Deere’ decision as a choice of one manufacturing technology over another. You need to analyze for a hypothetical example whether John Deere should use Technology 1 (Own Production), Technology 2 (Versatile), or whether it should stop producing four-wheel-drive tractors based on the quantity the company predicts it would sell in the market.
The following information regarding prices and technologies should be used to analyze this case (all numbers are in thousands): Technology 1: Fixed cost of $200 and marginal cost of $10. Technology 2: Fixed cost of $150 and marginal cost of $20. John Deere can sell a tractor for $30 (all numbers are in thousands).
1. Calculate the break even quantity for technology 1.
2. Calculate the break even quantity for technology 2.
3. Represent the total cost of technology 1, the total cost of technology 2, and the total revenue in a graph in which you place the quantity on the horizontal axis and the total cost
4. Analyze for which quantity it is optimal to use technology 1, for which technology 2, and in which circumstances it is optimal to abandon production.