Refer to Problem. If a contract for the second and third years is pending, what are the implications for process selection?
Problem - 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:
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General Purpose Equipment (GPE)
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Flexible Manufacturing System (FMS)
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Dedicated Machine (DM)
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Annual contracted units
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200,000
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200,000
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200,000
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Annual fixed cost
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$100,000
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$200,000
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$500,000
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Per unit variable cost
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$15.00
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$14.00
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$13.00
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Which process is best for this contract?