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At what annual production volume would management be indifferent between the two approaches?
Bundey’s Mfg. is a small manufacturer that makes metal parts based on customers’ engineering drawings. Some parts are one of a kind, but others are repeat orders from long-time customers for medium-sized quantities. For a new family of part types it has decided to start making, Bundey’s management is considering the creation of either a low-tech production line or a high-tech manufacturing cell. Because the family of parts is new for Bundey’s, management is very uncertain about what annual production volumes to expect. The production approach it selects will partly depend on the economics of each approach:
|Cost Data||Low-Tech Prod.||Line High-Tech Mfg Cell|
|Variable cost per part||$55,000||$87,000|
|Variable cost per part||$62.50||$48.25|
a. Which alternative is best?
b. At what annual production volume would management be indifferent between the two approaches? c. For what range of annual production volumes would each approach be preferred (Hint: Use the graphical approach)
d. What other considerations should be important in the decision?