A Firm Is About to Undertake the Manufacture of a Product

question 12

Essay

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 $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 percent; strong acceptance has a probability of 40 percent. The product will sell for $25 per unit regardless of the capacity decision. Which capacity choice should the firm make?

---

Definitions:

Bony Labyrinth

A complex system of channels and cavities within the temporal bone of the skull, important for hearing and balance.

Tectorial Membrane

A structure in the cochlea of the inner ear that contacts the cilia of the auditory hair cells, playing a critical role in the mechanism of hearing.

Spiral Organ

A structure located in the cochlea of the inner ear, critical for converting sound vibrations into electrical signals.

Cilia

Microscopic, hair-like structures on the surface of cells that move in a wave-like pattern to transport materials or aid in movement.