Asked by Charlie Giles on Jul 23, 2024
Verified
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?
Capacity Alternatives
Different options or strategies a business may consider to adjust or increase its capacity to meet demand.
Market Acceptance
The degree to which a new product, service, or business model is embraced by potential customers and the market at large.
- Master and execute the idea of capacity in a range of business environments.
- Use probability theory to inform decisions amidst uncertainty.
- Apprehend the consequences of choosing capacity options on the profit margins of a business.
Verified Answer
MS
Marcus SparksJul 29, 2024
Final Answer :
The payoffs are as follows: small job shop, moderate acceptance = $12,000; small job shop, strong acceptance = $27,000; large job shop, moderate acceptance = $10,000; large job shop, strong acceptance = $32,000; repetitive manufacturing, moderate acceptance = -$6,000; and repetitive manufacturing, strong acceptance = $18,000. The expected value for the small job shop decision alternative is $18,000. The expected value of the large job shop alternative is $18,800. The expected value for the repetitive manufacturing alternative is $3600. The firm should choose the large job shop capacity alternative.
Learning Objectives
- Master and execute the idea of capacity in a range of business environments.
- Use probability theory to inform decisions amidst uncertainty.
- Apprehend the consequences of choosing capacity options on the profit margins of a business.
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