Question17

Borges Machine Shop, Inc., has a 1-year contract for the production of 250,000 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 Flexible Manufacturing Dedicated Equipment (GPE) System (FMS) Machine (DM) Annual contracted units 250,000 250,000 250,000 Annual fixed cos $100,000 $250,000 $480,000 Per unit variable cost $15.00 $14.00 $13.00 If the contract for the second and third years is pending, for demand below 150,000 units, option is the best alternative for Luis. For demand above 230,000 units, option is the best alternative for Luis