In 1986, John Deere was building a capital intensive factory to produce large, four-wheel-drive farm tractors. Then
Question:
In 1986, John Deere was building a capital intensive factory to produce large, four-wheel-drive farm tractors. Then the price of wheat dropped dramatically, reducing demand for these tractors because they are used extensively for harvesting wheat. John Deere stopped construction of its own factory and attempted to purchase Versatile, a Canadian company that assembled tractors in a garage using off-the-shelf components. We can characterize John Deere’ decision as a choice of one manufacturing technology over another. You need to analyze for a hypothetical example whether John Deere should use Technology 1 (Own Production), Technology 2 (Versatile), or whether it should stop producing four-wheel-drive tractors based on the quantity the company predicts it would sell in the market. The following information regarding prices and technologies should be used to analyze this case (all numbers are in thousands):
Technology 1: Fixed cost of $200 and marginal cost of $10.
Technology 2: Fixed cost of $150 and marginal cost of $20.
John Deere can sell a tractor for $30 (all numbers are in thousands).
1. Calculate the break even quantity for technology 1.
2. Calculate the break even quantity for technology 2.
3. Represent the total cost of technology 1, the total cost of technology 2, and the total revenue in a graph in which you place the quantity on the horizontal axis and the total cost / revenue on the vertical axis (create the graph using Powerpoint).
4. Analyze for which quantity it is optimal to use technology 1, for which technology 2, and in which circumstances it is optimal to abandon production. (Use the approach presented in the "Titan Pickup Truck" solved problem to address the questions.)
(Titan Info:
The break even quantities can alternatively be obtained by exploring when total revenue equals the cost of technology 1 and the cost of technology 2.
For Technology 1: 48+23.5*Q=25*Q
Q=32
For Technology 2:
9.6+24*Q=25*Q
Q=9.6
To explore for which quantities the cost of Technology 1 equals the cost of Technology 2 we solve:
9.6+24*Q =48+23.5*Q
Q=76.80
Those quantities are also represented in the graph. For quantities below 9,600 trucks, the cost of either technology exceed the revenue (the blue and the green line are above the red line). If the producer expects to sell a volume below 9,600 trucks, it is best to abandon production. For quantities between 9,600 trucks and 76,800 trucks, the blue line is below the other two lines. The producers should produce using Technology 2. For quantities above 76,800 the green line is below the other two lines. The producer should use Technology 1.)
Expert Answer:
