Kyung-Dong Precision Machine Company (KPMC) rents Flexible Manufacturing machines (FMM) to automobile parts manufacturers (APMs). APMs market

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Question:

Kyung-Dong Precision Machine Company (KPMC) rents Flexible Manufacturing machines (FMM) to automobile parts manufacturers (APMs). APMs’ market consists of two segments: the short-term segment and the long-term segment. KPMC currently rents an average of 200 FMMs a week to the short-term segment and 200 FMMs a week to the long-term segment. The short-term segment rents for an average of 1.2 weeks, and the long-term segments rents for an average of 2 weeks. Short-term renters pay $10,000 per week, while long-term renters pay $25,000 per week. FMMs returned either have A-type damage or B-type damage. Assume that 20% of the FMMs returned are found to have A-type damage and require repairs before they can be made available for rent again when in fact only 15% should have been so classified (i.e., 5% should be classified as B-type damage). The remaining 5% (B-type damage) are discovered when their repairs for A-type damage are completed. These misclassified FMMs (5%) will go through B-type repair again. The remaining FMMs (80%) are going through B-type damage repair. However, 10% are incorrectly classified (i.e., 70% are correctly classified) and should go through an A-type damage repair.

These misclassified FMMs (10%) will go through A-type repair again. On average, there are 180 FMMs going through the B-type damage repair process. The cost of B-type damage repair is $5,000 per FMM equipment. On average, the A-type damage repair process spends 1.2 weeks and incurs an average cost of $35,000 per FMM. Assume that FMMs are rented as soon as they are available for rent. Assume that each FMM loses $1,200 in value per week because of depreciation.

(a) Computes the profit margin per week for the current system.

(b) Operations manager is comparing two possible improvement options:

Option 1. Decrease incorrect classification of B-type damage from 10% to 5%.

Option 2. Decrease cost A-type repair from $35,000 to $X.

Operations manager will adopt Option 2 if X is higher or lower than _$____________. Why?

(c) Marketing manager has suggested an option of placing an advertisement (with cost=$1/week) in a newspaper so that the weekly rent of the short-term segment can be increased by 20 units (200è220 units). Do you agree with the marketing manager’s suggestion? Why?