A Firm Is About to Undertake the Manufacture of a Product

question 42

Essay

A firm is about to undertake the manufacture of a product, and is weighing three capacity alternatives: small job shop, large job shop, and repetitive manufacturing. The small job shop has fixed costs of $3,000 per month, and variable costs of $10 per unit. The larger job shop has fixed costs of $12,000 per month and variable costs of $3 per unit. The repetitive manufacturing plant has fixed costs of $30,000 and variable costs of $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 $25 per unit regardless of the capacity decision. Which capacity choice should the firm make?

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Definitions:

Legal Obligation

A duty bound by law that requires an individual or entity to act or refrain from acting in a certain way.

Family Heirloom

A valuable object that is passed down from generation to generation within a family, often carrying sentimental value.

Natural Resource Development

The process of cultivating, extracting, and managing natural resources such as minerals, oil, and timber for economic gain.

Environmental Protection

Measures and policies aimed at the preservation of natural resources and prevention of pollution to safeguard the environment for future generations.