Borges Machine Shop, Inc., has a 1-year contract for the production of 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 250,000 250,000 250,000

Annual fixed cost $150,000 $225,000 $525,000

Per unit variable cost $15.00 $14.00 $13.00

1) If the contract for the second and third years is pending, for demand below 75000 units, option FMS is the best alternative for Luis.

2) For demand above 300000 units, option DM GPE FMS is the best alternative for Luis.