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:

Provoke

To stimulate or incite someone to action or feeling, often with the intent of eliciting a specific reaction.

Proactively

describes taking initiative by acting in advance of a future situation, rather than just reacting, to achieve better results.

Impending Impasse

An approaching stalemate or deadlock situation where progress seems difficult or impossible.

Confrontation

A direct engagement or clash between parties over divergent interests, perspectives, or opinions.