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	$100,000	$200,000	$525,000
Per unit variable cost	$18.00	$14.00	$13.00

If the contract for the second and third years is pending, for demand below

25,000

units, option

DM

GPE

FMS

is the best alternative for Luis.

For demand above

325,000

units, option

DM

FMS

GPE

is the best alternative for Luis.