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    Determining the best manufacturing process

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    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

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    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.