A company that produces pleasure boats has decided to expand one of its lines. Current facilities are insufficient to handle the increased workload, so the company is considering three alternatives, A (new location), B (subcontract), and C (expand existing facilities).
Alternative A would involve substantial fixed costs but relatively low variable costs: fixed costs would be $250,000 per year, and variable costs would be $500 per boat. Subcontracting would involve a cost per boat of $2,500, and expansion would require an annual fixed cost of $50,000 and a variable cost of $1,000 per boat.
|a.||Find the range of output for each alternative that would yield the lowest total cost.|
|b.||Which alternative would yield the lowest total cost for an expected annual volume of 150 boats?
Tasks a. and b. have to follow these steps:
Step 1. Determine the tital cost equiation for each alternative.
Step 2. Graph the alternatives
Step 3. Determine over what range each alternative is preffered.
|c.||What other factors might be considered in choosing between expansion and subcontracting?
d. Rework Problem 4b using this additional information: Expansion would result in an increase of $70,000 per year in transportation costs, subcontracting would result in an increase of $25,000 per year, and adding a new location would result in an increase of $4,000 per year.