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Determining the best manufacturing process

Meile Machine Shop, Inc., has a 1-year contract for the production of 200,000 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), and expensive, but efficient, dedicated machine (DM). The cost data follow:

OPTION 1 ( GPE)

Annual contracted units 200,000
Annual Fixed Cost $ 100,000
Per unit variable cost 15.00

OPTION 2 ( FMS)

Annual contracted units 200,000
Annual Fixed Cost $ 200,000
Per unit variable 14.00

OPTION 3 ( DM)

Annual contracted units 200,000
Annual Fixed Cost $ 500,000
Per unit variable cost 13.00

7.7 Using the data in Problem 7.5, determine the best process for each of the following volumes: (1) 75,000, (2) 275,000 and (3) 375,000

Solution Preview

1) Volume =Q=75000 units

Option 1, GPE
Total Fixed Cost=TFC=$100,000
Total Variable Costs=TVC=15*75000=$1,125,000
Total Cost=TFC+TVC=100000+1125000=$1,225,000

Option 2, FMS
Total Fixed Cost=TFC=$200,000
Total Variable Costs=TVC=14*75000=$1,050,000
Total Cost=TFC+TVC=200000+1050000=$1,250,000

Option 3, DM
Total Fixed Cost=TFC=$500,000
Total Variable Costs=TVC=13*75000=$975,000
Total ...

Solution Summary

Solution determines the best process for the given levels of activity.

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