Question

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 $310,000 per year, and variable costs would be $400 per boat. Subcontracting would involve a cost per boat of $3,200, and expansion would require an annual fixed cost of $74,000 and a variable cost of $1,200 per boat.Expansion would result in an increase of $88,000 per year in transportation costs, subcontracting would result in an increase of $32,000 per year, and adding a new location would result in an increase of $5,300 per year.Which alternative would yield the lowest total cost for an expected annual volume of 111 boats?

Answer 1

Answer:

C alternative would yield the lowest total cost for an expected annual volume of 111 boats

Explanation:

The computation of each alternatives are shown below:

A (new location)

Fixed cost                                     $310,000

Variable cost ($400 × 111 boats) $44,400

Transportation cost                      $5,300

Total cost                                      $359,700

B (subcontract)

Fixed cost                                       $0

Variable cost ($3,200 × 111 boats)$355,200

Transportation cost                      $32,000

Total cost                                      $387,200

C (expand existing facilities)

Fixed cost                                     $74,000

Variable cost ($1,200 × 111 boats) $133,200

Transportation cost                      $88,000

Total cost                                      $295,200

Out of these, the alternative C has the lowest total cost