Operation Management.

A firm is about to undertake the manufacture of a product, and it is weighing three capacity alternatives: small job shop, large job shop, and repetitive manufacturing. The small job shop has fixed costs of Tk.3,000 per month, and variable costs of Tk.10 per unit. The larger job shop has fixed costs of Tk.12,000 per month and variable costs of Tk.3 per unit. The repetitive manufacturing plant has fixed costs of Tk.30,000 and variable costs of Tk.1 per unit. Demand for the product is expected to be 1,000 units per month with “moderate” market acceptance, but 2,000 under “strong” market acceptance. The probability of moderate acceptance is estimated to be 60%; strong acceptance has a probability of 40%. The product will sell for Tk.25 per unit regardless of the capacity decision. Which capacity choice should the firm make?

Sample solution

Expected volume = 60%*1000 + 40%*2000 = 1400 units

Small Shop :

Cont pu = SP – VC = 25-10 = 15

So BEP = FC/Cont pu = 3000/15 = 200 units

Large Shop :

Cont pu = SP – VC = 25-3 = 22

So BEP = FC/Cont pu = 12000/22 = 546 units

Repetitive Mfg :

Cont pu = SP – VC = 25-1 = 24

So BEP = FC/Cont pu = 30000/24 = 1250units

As Monthly demand is 140 units, and Small shop has lowest BEP. Small shop should be used for Mf