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Assignment 3: Problem 1

A firm plans to begin production of a new small appliance. Management should decide whether to make the small engine of this product in-plant, or buy it from an outside source.

If management decide to make the engine, then there are 2 alternatives(1) To built it with a simple manufacturing system, or (2) To built it with an advanced manufacturing system.The fixed cost of alternative (1) is 10,000$ / year and its variable cost

is 8$ per unit.The fixed cost of alternative (2) is 30,000$ / year and its variable cost

is 5$ per unit.Purchase price of the engine is 10$ per unit.

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Prepare a table similar to the following table, to summarize your recommendationsDemand Recommendation

Q <= ? ?

? < Q < = ? ?

? < Q ?

BEP for 3 Alternatives and Summary

3

Purchasing vs. Manufacturing I

1000 2000 3000 4000 5000 6000 7000 8000 9000 10000

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000

10Q

10,000+8Q

10000+8Q=10Q2Q=10000

Q=5000

4

Manufacturing I vs. Manufacturing II

1000 2000 3000 4000 5000 6000 7000 8000 9000 10000

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000

30,000+5Q

10,000+8Q

10000+8Q=30000+5Q3Q=20000

Q=6667

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Executive Summary

We summarize our recommendations as

Demand Recommendation

Q <= 5000 Buy

5000 < Q < = 6667 Manufacture Alternative I

6667 < Q Manufacture Alternative II

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A manager has the option of purchasing 1, 2, or 3 machineCapacity of each machine is 300 units.

Fixed costs are as followsNumber of Machines Fixed cost Total Capacity1 9600 1-3002 15000 300-6003 20000 600-900

Variable cost is 10$ per unit, sales price of product is 40$ per unit

Tell management what to do

Assignment 3: Problem 2

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BEP for 3 Alternatives and Summary

Prepare an executive summary

Q<= ? ??<Q<=? ?Q>? ?

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BEP: One Machine

100 200 300 400 500 600 700 800 900 1000

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

9600+10Q

40Q

320

9600 + 10Q = 40Q9600= 30Q

The beak-even point for 1 machine is 320But one machine can not produce more than 300Demand <= 300 No ProductionOtherwise Consider two machines

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BEP: Two Machines

100 200 300 400 500 600 700 800 900 1000

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

15000+10Q40Q

500

15000 + 10Q = 40Q15000= 30Q

The beak-even point for 2 machines is 500Demand <= 500 No ProductionOtherwise Two machines and consider three machines

10

BEP: Three Machines

100 200 300 400 500 600 700 800 900 1000

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

20000+10Q40Q

667

20000 + 10Q = 40Q20000= 30Q

The beak-even point for 3 machines is 667 500<=Demand <= 667 Produce up to 600 using 2 machinesOtherwise Three machines

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Executive Summary

Q<= 500 DoNothing

500<Q<=667 Buy two machines and produce 500< Q<= 600

Q>667 Buy three machines and produce 667<Q<=900

Now it is to Marketing Department to provide executive summary regarding the demand

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Strategic Positioning of CSUNIf we take the quality of the education you get at CSUN and divide it by its cost for you and your parents, then CSUN is ranked among top Universities in the Nation.

Cost

Qua

lity

P

UC

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However, quality of education at CSUN largely depends on the students. Are you getting the highest quality education? Perhaps we can test this hypothesis.Please go back to the previous slides.We have made a mistake.If you can find out the mistake, then perhaps You are saving lots and lots of money for your parents, at the same time, you are among the best undergraduate students in the Nation.

Student Contribution

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Maximum Profit With Two Machine

100 200 300 400 500 600 700 800 900 1000

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

15000+10Q40Q

TC = 15000 + 10(600) TC = 21000 TR = 40(600) = 24000Profit = 24000-21000 = 3000

}

You do not switch to 3 machines unless you make 3000 profit

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Wrong Recommendation

Q<= 500 DoNothing500<Q<=667 Buy two machines and produce 500<Q<= 600Q>667 Buy three machines and produce 667<Q<=900

20000 + 10Q = 40Q20000= 30Q Q = 667

20000 + 10Q +3000= 40Q23000= 30Q Q = 767

At Q = 667 you make 0 profit with 3 machines

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Executive Summary

Q<= 500 DoNothing

500<Q<=767 Buy two machines and produce 500<Q<= 600

Q>767 Buy three machines and produce 767<Q<=900

Now it is to Marketing Department to provide executive summary regarding the demand