CHAPTER 7 TECHNICAL: CASE #7 Borges Machine Shop, Inc., has a 1-year contract for the production of 200,000 gear housing for a new off-road vehicle. Owner Luis Borges hopes the contract will be extended and the volume increase next year. Borges has developed costs for three alternatives - these are general-purpose equipment (GPE), flexible manufacturing system (FMS) and expensive but efficient dedicated machine (DM). The costs are as follows: PLEASE ANSWER #5 and focus on the graph GPE FMS DM ANNUAL CONTRACTED UNITS TO BE PRODUCED 200,000 200,000 200,000 ANNUAL FIXED COSTS $100,000 $200,000 $500,000 PER UNIT VARIABLE COSTS $15.00 $14.00 $13.00 1) Determine the most economical volume for each process (the crossover points) Contracted units = 200,000 Total costs for option GPE = $100,000 + ($15 x 200000) = $3,100,000 Total costs for option FMS = $200,000 + ($14 x 200000) = $3,000,000 Total costs for option DM = $500,000 + ($13 x 200000) = $3,100,000 From the above calculations, Flexible Manufacturing System (FMS) is best for this contract, i.e., for the production units of 200,000 gear housings at a total cost of $3,000,000. 2) Using the break-even analysis, the most economical volume for each process is given as; Let the contracted units = x (i) $100,000 + $15x = $200,000 + $14x x = 100,000 The option GPE is best when the contracted volume is between 0 and 100,000 units. (ii) $200,000 + $14x = $500,000 + $13x x = 300,000 The option FMS is best when the contracted volume is between 100,000 units and 300,000 units. The option DM is best when the contracted volume is above 300,000 units. 3) Determine the best process for each of the following volumes to be produced: From the above calculations, we can determine that; At 75,000 units, GPE is the most economical and best process. At 275,000 units, FMS is the most economical and best process. At 375,000 units, DM is the most economical and best process. 4) If a contract for the second and third years is pending, what the implications for process selection?

If a contract for the second and third years is pending, the total production volume for the production units will be equal to 600,000 units (200,000 per year x 3 years). For the production of 600,000 units, DM would be the most economical and best process.

5 )Prepare a GRAPH showing the FIXED COSTS, TOTAL COSTS (VARIABLE COSTS X QUANTITIES), and CROSSOVER POINTS for each process and each volume.