Problem 7.

5
Meile Machine Shop, Inc., has a one year contract for the production of 200,000 gear housings for a new
off-road
vehicle. Owner Larry Meile hopes the contract will be extended and the volume increased next year. Meile
has
developed costs for three alternatives. They are general-purpose equipment (GPE), flexible manufacturing
system (FMS),
and expensive, dedicated machine (DM). The cost data follow:
General Purpose Equip (GPE) Felixible Manufacturing System (FMS) Dedicated Machine (DM)
Annual contracted units 300,000 300,000 300,000
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?
For U units produced, the functions are as follows
For GPE, the cost is C = 100000 +15U
For FMS, the cost is C = 200000 + 14U
For DM, the cost is C = 500000 + 13U.
Letting U = 200,000, we see that
GPE C = 100000 +15(200000)=3100000
FMS C = 200000+14(200000)=3000000
DM C = 500000 + 13(200000) = 3100000
So, the cheapest is FMS.
Problem 7.7
Using the data in problem 7.5, determine the best process for each of the following volumes:

(1) 75,000
(2) 275,000 and
(3) $375,000.
We proceed as above, but this time with different values for U.
When U = 75000,
GPE C = 1225000
FMS C = 1250000
DM C = 1475000
So, the cheapest is GPE
When U = 275000,
GPE C = 4225000
FMS C = 4050000
DM C = 4075000
So, the cheapest is FMS.
When U = 375000
GPE C = 5725000

FMC C = 5450000
DM C = 5375000
So, the cheapest is DM.