The Cross-Over Production Location Model is a decision support model that is designed to aid managers in
Question:
The Cross-Over Production Location Model is a decision support model that is designed to aid managers in their production decisions. Oftentimes, a firm has multiple production facilities (i.e., factories, foundries). Each of these facilities may be characterized by their own Fixed Costs and Variable Costs per unit. Sometimes these facilities are located in the same country, other times there are multiple locations regionally or internationally.
The Cross-Over Production Location Model informs management on where to produce amongst a series of alternative production sites in an effort to minimize Total Costs for a profit maximizing firm. It also identifies the profit that will be earned at each site for a particular production run or lot size. Importantly, it identifies the exact point at which production facilities are equal in terms of overall cost- a point at which management is said to be "indifferent" in that the total costs are equal between the two locations. These are also called Cross-Over points - where the more economical production decision crosses over from one location to the next with the next additional unit of production.
An example of a firm that utilized several production sites internationally was La Crosse Footwear - a manufacturer of high-end boots for extreme climates and various high intensity jobs initially produced only on La Crosse, WI. At one point La Crosse Footwear was producing all of its models in three different locations: A) La Crosse, Wisconsin; B) Merida, Yucatan, Mexico; and C) port cities in China. The primary variable in determining which site to utilize was the Variable Cost per unit. Clearly Mexico was cheaper than USA because of the labor cost. Similarly, China was cheapest because the labor rate was the cheapest on a per unit basis. Aside: though La Crosse Footwear manufactured at all three locations it did so for only a short time frame as the cost of production became cheaper and cheaper in China, the firm eventually moved all of the production to China.
GLOSSARY OF TERMS:
Production Run: is a production lot size over a given length of time at a particular location, such as a factory.
Fixed Costs: are those costs that are fixed regardless of production runs. Fixed Costs include overhead, equipment, manager's salaries, and so forth.
Variable Costs: are those costs that vary with the production lot size or production run and are usually expressed on a per unit basis.
Profit: the basic Profit formula of Revenue minus Total Costs is used in this lesson, and does not consider taxes nor interest.
PROBLEM
Nike wishes to produce a particular line of retro basketball shoes called Nike Cortez. Below are the three production facility options. A monthly basis is assumed. Round to two places beyond the decimal. Assume US Dollars. Nike wants to sell 3161 pair this week. The selling price is $ 81 per pair, x. All answers must be in appropriate units, and rounded to the nearest cent, i.e. two points beyond the decimal.
City | Fixed Costs | Variable Cost per Unit |
---|---|---|
Singpore | 40226 | 82 |
Juarez City | 65717 | 51 |
That's it | 115934 | 26 |
Use exact values throughout. Many students are experiencing the situation of inexact values being accepted by WeBWorK in part 1, but not being accepted in further parts. It will be easier to use exact values in all parts.
Part 1
(a) Calculate the Location Crossover algebraically for Singapore and Ciudad Juarez. x=
(b) Calculate the Location Crossover algebraically for Ciudad Juarez and Bangkok. x=
(c) Calculate the Location Crossover algebraically for Singapore and Bangkok. x=
Part 2
(a) Calculate the revenue at the location crossover for Singapore and Ciudad Juarez. Revenue = dollars
(b) Calculate the revenue at the location crossover for Ciudad Juarez and Bangkok. Revenue = dollars
(c) Calculate the revenue at the location crossover for Singapore and Bangkok. Revenue = dollars
Part 3
(a) Calculate the profit at the location crossover for Singapore and Ciudad Juarez. Profit = dollars
(b) Calculate the profit at the location crossover for Ciudad Juarez and Bangkok. Profit = dollars
(c) Calculate the profit at the location crossover for Singapore and Bangkok. Profit = dollars
Engineering Economy
ISBN: 978-0132554909
15th edition
Authors: William G. Sullivan, Elin M. Wicks, C. Patrick Koelling