Practice Problems: Chapter 7, Process Strategy

Problem 1:

Jackson Custom Machine Shop has a contract for 130,000 units of a new product. Sam Jumper, the owner, has calculated the cost for three process alternatives. Fixed costs will be: for general-purpose equipment (GPE), $150,000; flexible manufacturing (FMS), $350,000; and dedicated automation (DA), $950,000. Variable costs will be: GPE, $10; FMS, $8; and DA, $6. Which should he choose?

Problem 2:

Solve Problem 1 graphically

Problem 3:

Using either your analytical solution found in Problem 1, or the graphical solution found in Problem 2, identify the volume ranges where each process should be used.

Problem 4:

If Jackson Custom Machine is able to convince the customer to renew the contract for another one or two years, what implications does this have for his decision?

ANSWERS:

Problem 1:

Solve for the crossover between GPE and FMS:

or

Solve for the crossover between FMS and DA:

or

Therefore, at a volume of 130,000 units, FMS is the appropriate strategy.

Problem 2 & 3:

1

Below 100,000 units use GPE, between 100,000 and 300,000 use FMS, above 300,000 use DA

Problem 4:

If Jackson Custom Machine is able to get the customer to extend the contract for another two years, the owner would certainly wish to take advantage of the savings using Dedicated Automation.

2