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    Selecting the suitable alternative

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    A manufacturer is evaluating options regarding his production equipment. He is trying to decide whether he should refurbish his old equipment for $70,000, make major modifications to the production line for $135,000, or purchase new equipment for $230,000. The product sells for $10, but the variable costs to make the product are expected to vary widely, depending on the decision that is to be made regarding the equipment. If the manufacturer refurbishes, the variable costs will be $7.20 per unit. If he modifies or purchases new equipment, the variable costs are expected to be $5.25 and $4.75, respectively.

    (a) Which alternative should the manufacturer choose if it the demand is expected to be between 30,000 and 40,000 units?
    (b) What will be the manufacturer's profit if the demand is 38,000 units?

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    Solution Preview

    A manufacturer is evaluating options regarding his production equipment. He is trying to decide
    whether he should refurbish his old equipment for $70,000, make major modifications to the
    production line for $135,000, or purchase new equipment for $230,000. The product sells for $10,
    but the variable costs to make the product are expected to vary widely, depending on the decision
    that is to be made regarding the equipment. If the manufacturer refurbishes, the variable costs will
    be $7.20 per unit. If he modifies or purchases new equipment, the variable costs are expected to be
    $5.25 and ...

    Solution Summary

    The solution depicts the steps to select the appropriate alternative depending upon the given demand forecast. What the manufacturer's profit if the demand is 38,00 units is determined.

    $2.19