Two years ago, a new immune system treatment, Ultamyacin, was discovered by a Smitheford researcher. The drug could be manufactured at the Pueblo facility for the bulk manufacturing, but the final manufacturing steps could be made in Puerto Rico for final purification and then sent to Fort Collins for final manufacturing into sterile bottles for injection.
Smitheford leadership has narrowed the decision making down to 2 options. The first is a higher technology option in one location, and the other is a lower technology option in several locations.
High Technology Low Technology
Centralized Location Decentralized Location
Annual Fixed Cost $620,000 $110,000
Variable Cost/Product 16.31 18.89
Estimated Annual Production
(in number of products) Year 1 100,000 100,000
Year 5 170,000 170,000
Year 10 225,000 225,000
Use applicable business formulas to determine costs for both options.
Consider the following questions:
Which is the lead cost alternative in Years 1, 5, and 10?
How much would the variable cost per unit have to be in Year 5 for the automated alternative to justify the additional annual fixed cost of the automated alternative over the manual alternative?
Determine what other factors should be considered when deciding the following:
When to centralize manufacturing
When to opt for higher technology options
850-1000 words