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 $244,800 per year, and variable costs would be $800 per boat. Subcontracting would involve a cost per boat of $3,000 and a fixed cost of $27,000, and expansion would require an annual fixed cost of $156,000 and a variable cost of $1,600 per boat.
Expansion would result in an increase of $84,000 per year in transportation costs, subcontracting would result in an increase of $27,000 per year, and adding a new location would result in an increase of $4,800 per year.
Which alternative would yield the lowest total cost for an expected annual volume of 118 boats?