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?

the crossover between GPE and FMS:

10X+150000 = 8X+350000
Or
2X = 200000
X = 100,000 units
the crossover between FMS and DA:
8X + 350000 = 950000
Or
2X = 600000
X = 300000
The better strategy is FMS, at volume of 130,000 units
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.

process cost chart

700000

600000

500000

400000
Use Use Use
GPE FMS DA
300000

200000

100000

0
100000 200000 300000 400000 500000 600000

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?
 If your customer contract can be extended for another two years, the owner
would probably want to take advantage of the savings through dedicated
automation.