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    Operations Management :Capacity Planning

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    A shop wants to increase capacity by adding a new machine. The firm is considering proposals from vendors A and B. The fixed costs for machine A are $90,000 and for machine B, $75,000. The variable cost for A is $15 per unit and for B $18 per unit. The revenue generated by the units processed on these machines is $22 unit. If the estimated output is 9,000 units which machine should be purchased?

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    Solution Preview

    Problem description: Choose the machine which provides maximum net profit.
    Problem elements: Fixed of purchasing a machine is given along with operating (variable) cost. Per unit revenue is also given, therefore net profit for 9000 units of products can be computed.

    Methodology to choose a machine:
    Step 1: Compute net profit which is given ...

    Solution Summary

    The solution explains which machine should be purchased to maximize the profit at given level of output.