Borges Machine Shop, Inc., has a 1-year contract for the production of 200,000 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 aregeneral-purpose equipment (GPE), flexible manufacturing system(FMS), and expensive, but efficient, dedicated machine (DM). The cost data follow:

General-Purpose Equipment (GPE)

Flexible Manufacturing System (FMS)

Dedicated Machine (DM)

Annual contracted units

200,000

200,000

200,000

Annual fixed cost

$100,000

$200,000

$500,000

Per unit variable cost

$15.00

$14.00

$13.00

The option GPE is best when the contracted volume is below nothing units (enter your response as a whole number).

The option FMS is best when the contracted volume is between nothing and nothing units (enter your responses as whole numbers).

The option DM is best when the contracted volume is overunits (enter your response as a whole number).

Task 1:

GPE is best when the contracted volume is below 25,000 units.

Task 2:

FMS is best when the contracted volume is between 25,000 and 300,000 units.

Task 3:

DM is best when the contracted volume is over 300,000 units.

Explanation:

The schedule for total cost is attached.

The option GPE is best when the contracted volume is below nothing units (enter your response as a whole number).

GPE is best when the contracted volume is below 25,000 units.

GPE is best when cost for GPE is less than other two.

Difference between the variable cost per unit of GPE and FMS = $18 per unit - $14 per unit = $4 per unit.

Difference between the fixed cost of GPE and FMS = $200,000 - $100,000 = $100,000

The difference of cost between GPE and FMS can be found by (assuming n units produced)

GPE-FMS: 4n – $100,000

The cost difference has to be zero in order to lower the cost for GPE

Hence 4n-$100,000=0

Hence n = 25,000

GPE is best when the contracted volume is below 25,000 units.

The option FMS is best when the contracted volume is between nothing and nothing units (enter your responses as whole numbers).

FMS is best when the contracted volume is between 25,000 and 300,000 units.

To compare FMS:

The cost has to be in between GPE and FMS

Considering difference between GPE and FMS

n = 25,000 (from above calculation)

Considering FMS and DM:

Difference in variable cost per unit of FMS and DM = $14 - $13 = $1 per unit

Difference in fixed cost of FMS and DM = $500,000 - $200,000 = $300,000

Difference = n – $300,000

n-300,000=0

n = 300,000

Hence FMS is best when the contracted volume is between 25,000 and 300,000 units.

The option DM is best when the contracted volume is over units (enter your response as a whole number).

DM is best when the contracted volume is over 300,000 units.

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