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Refer to Problem. If a contract for the second and third years is pending, what are the implications for process selection?
Problem - 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 are general-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
Annual fixed cost
$100,000
$200,000
$500,000
Per unit variable cost
$15.00
$14.00
$13.00
Which process is best for this contract?
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