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 $250,000 per year, and variable costs would be $500 per boat. Subcontracting would involve a cost per boat of $2,500, and expansion would require an annual fixed cost of $50,000 and a variable cost of $1,000 per boat.
a. Find the range of output for each alternative that would yield the lowest total cost.
b. Which alternative would yield the lowest total cost for an expected annual volume of 150 boats?
Tasks a. and b. have to follow these steps:
Step 1. Determine the tital cost equiation for each alternative.
Step 2. Graph the alternatives
Step 3. Determine over what range each alternative is preffered.
c. What other factors might be considered in choosing between expansion and subcontracting?
d. Rework Problem 4b using this additional information: Expansion would result in an increase of $70,000 per year in transportation costs, subcontracting would result in an increase of $25,000 per year, and adding a new location would result in an increase of $4,000 per year.