Question

Borges Machine Shop, Inc. has a 1-year contract for the production of 200,000 gear housings for a new off-road vehicle. Owner Luis Borges hopes the contract will be extended and the volume increased next year. Borges 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:
General Purpose Flexible Manufacturing Dedicated
Equipment System Machine
GPE FMS DM
Annual contracted units 200,000 200,000 200,000
Annual fixed cost $100,000 $200,000 $500,000
Per unit variable cost $15 $14 $13
Which process is best for this contract?

Answer 1

Answer:

FMS

Explanation:

The computation is shown below;

For GPE

Given that

Annual contracted unit(Q) = 200000 units

Fixed cost (FC) = $100000

Variable cost (VC) = $15

Now  

Total cost = FC + (Q × VC)

= 100000 + (200000 × 15)

= 100000 + 3000000

= $3100000

For FMS

Given that

Annual contracted unit(Q) = 200000 units

Fixed cost (FC) = $200000

Variable cost (VC) = $14

Total cost = FC + (Q × VC)

= 200000 + (200000 × 14)

= 200000 + 2800000

= $3000000

For DM

Given that

Annual contracted unit(Q) = 200000 units

Fixed cost (FC) = $500000

Variable cost (VC) = $13

Total cost = FC + (Q × VC)

= 500000 + (200000 × 13)

= 500000 + 2600000

= $3100000

So for this type of contract FMS is best as it contains the lowest total cost.