Question: 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
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:
| General-Purpose Equipment (GPE) | Flexible Manufacturing System (FMS) | Dedicated Machine (DM) | |
| Annual contracted units | 200,000 | 200,000 | 200,000 |
| Annual fixed cost | $150,000 | $225,000 | $500,000 |
| Per unit variable cost | $16.00 | $14.00 | $13.00 |
The option GPE is best when the contracted volume is below units
The option FMS is best when the contracted volume is between and units
The option DM is best when the contracted volume is over units
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