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Humber College BMGT 203 A firm is about to undertake the manufacture of a product, and it is weighing the process configuration options
A firm is about to undertake the manufacture of a product, and it is weighing the process configuration options. There are two intermittent processes under consideration, as well as a repetitive focus. The smaller intermittent process has fixed costs of $3,000 per month and variable costs of $10 per unit. The larger intermittent process has fixed costs of $12,000 per month and variable costs of $2 per unit. A repetitive focus plant has fixed costs of $50,000 per month and variable costs of $1 per unit.
a. At what output does the large intermittent process become cheaper than the small one?
b. At what output does the repetitive process become cheaper than the larger intermittent process?
c. Draw a crossover chart showing the total cost lines of each alternative.
Expert Solution
Answers:
a) Cost = Fixed Cost + Variable Cost per unit * quantity produced
We find the indifference point at quantity x such that the cost for large intermittent process = cost for small intermittent process
Because the variable cost of large intermittent process is less than the small one, beyond quantity x, the cost of large intermittent process is less than the cost of small intermittent process
cost for large intermittent process = cost for small intermittent process
12000 + 2 * x = 3000 + 10 * x
x = (12000 - 3000) / (10 - 2)
x = 1125
At output of 1125 units, the cost of large intermittent process will be less than the cost of small intermittent process.
b) We find the indifference point at quantity y such that the cost for large intermittent process = cost for repetitive process
Because the variable cost of repetitive process is less than the large intermittent process, beyond quantity y, the cost of repetitive process is less than the cost of large intermittent process
cost for repetitive process = cost for large intermittent process
50000 + 2 * x = 12000 + 2 * x
x = (50000 - 12000) / (2 - 1)
x = 38000
At output of 38000 units, the cost of repetitive process will be less than the cost of large intermittent process.
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