CHAPTER 7 TECHNICAL CASE

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:

	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

[NOTICE: Units remain the same but fixed costs increase with the cost of the equipment but per unit costs decrease due to the increased efficiency of the equipment]

As the consultant, you need to:

1. Determine the most economical volume for each process (the crossover points);
2. Determine which process to select for the contract identified above (200,000 units);
3. Determine the best process for each of the following volumes to be produced:
   1. 75,00
   2. 275,000
   3. 375,000
4. If a contract for the second and third years is pending, what the implications for process selection?
5. Prepare a GRAPH showing the FIXED COSTS, TOTAL COSTS (VARIABLE COSTS X QUANTITIES), and CROSSOVER POINTS for each process and each volume.

Write out your work for each, show the answer, and prepare a one-page summary that answers each of the questions.