Question

An organization is considering three process configuration options. There are two different intermittent processes, 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 and variable costs of $1 per unit.

 a. If the company produced 20,000 units, what would be its cost under each of the three choices?

 b. Which process offers the lowest cost to produce 40,000 units? What is that cost?

Answer 1

Smaller intermittent process:

Fixed Cost = FCsi = $3000

Variable cost = VCsi = $10 per unit

Larger intermittent process:

Fixed Cost = FCli = $12000

Variable cost = VCli = $2 per unit

Repetitive process:

Fixed Cost = FCr = $50000

Variable cost = VCr = $1 per unit

Production required = P = 20,000 units

Cost under each option:

Smaller intermittent process:

Cost = FCsi + VCsi * P = 3000 + 10*20000 = $203,000‬

Larger intermittent process:

Cost = FCli + Vcli * P = 12000 + 2*20000 = $52,000

Repetitive process:

Cost = FCr + Vcr * P = 50000 + 1*20000 = $70,000

b) For Q = 40,000 units

Cost under each option:

Smaller intermittent process:

Cost = FCsi + VCsi * P = 3000 + 10*40000 = $403,000‬

Larger intermittent process:

Cost = FCli + Vcli * P = 12000 + 2*40000 = $92,000

Repetitive process:

Cost = FCr + Vcr * P = 50000 + 1*40000 = $90,000

As seen from above, Repetitive process offers the lowest cost to produce 40,000 units. The cost is $90,000

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