(solution) Problem 7:1 Tanner's Machine Shop, Inc., has a 1-year contract

(solution) Problem 7:1 Tanner's Machine Shop, Inc., has a 1-year contract

Problem 7:1

Tanner?s Machine Shop, Inc., has a 1-year contract for the production of 250,000 gear housings for a new off-road vehicle. Owner Danny Tanner hopes the contract will be extended and the volume increased next year. Tanner 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 equipment (GPE)

flexible manufacturing system (FMS)

dedicated machine (DM)

Annual contracted units

250,000

250,000

250,000

Annual fixed cost

$150,000

$250,000

$550,000

Per unit variable cost

$16.00

$15.00

$14.00

  • Which process is best for this contract?

  • Determine the economical volume for each process.

  • Determine the best process for each of the following volumes: (1) 70,000, (2) 265,000, and (3) 380,000.