Assignment 3: Problem 1 A firm plans to begin production of a new small appliance. Management should decide whether to make the small engine of this product in-plant, or buy it from an outside source. If management decide to make the engine, then there are 2 alternatives (1) To built it with a simple manufacturing system, or (2) To built it with an advanced manufacturing system. The fixed cost of alternative (1) is 10,000$ / year and its variable cost is 8$ per unit. The fixed cost of alternative (2) is 30,000$ / year and its variable cost is 5$ per unit. Purchase price of the engine is 10$ per unit.

BEP for 3 Alternatives and Summary Prepare a table similar to the following table, to summarize your recommendations Demand Recommendation Q <= ? ? ? < Q < = ? ? ? < Q ?

Purchasing vs. Manufacturing I 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000 20000 30000 40000 50000 60000 70000 80000 90000 100000 10000+8Q=10Q 2Q=10000 10,000+8Q 10Q Q=5000

Manufacturing I vs. Manufacturing II 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000 20000 30000 40000 50000 60000 70000 80000 90000 100000 10000+8Q=30000+5Q 3Q=20000 30,000+5Q 10,000+8Q Q=6667

Executive Summary We summarize our recommendations as Demand Recommendation Q <= 5000 Buy 5000 < Q < = 6667 Manufacture Alternative I 6667 < Q Manufacture Alternative II

Assignment 3: Problem 2 A manager has the option of purchasing 1, 2, or 3 machine Capacity of each machine is 300 units. Fixed costs are as follows Number of Machines Fixed cost Total Capacity 1 9600 1-300 2 15000 300-600 3 20000 600-900 Variable cost is 10$ per unit, sales price of product is 40$ per unit Tell management what to do

BEP for 3 Alternatives and Summary Prepare an executive summary Q<= ?  ? ?<Q<=?  ? Q>?  ?

BEP: One Machine The beak-even point for 1 machine is 320 But one machine can not produce more than 300 Demand <= 300  No Production Otherwise  Consider two machines 100 200 300 400 500 600 700 800 900 1000 5000 10000 15000 20000 25000 30000 35000 40000 45000 50000 40Q 9600+10Q 9600 + 10Q = 40Q 9600= 30Q 320

BEP: Two Machines The beak-even point for 2 machines is 500 Demand <= 500  No Production Otherwise  Two machines and consider three machines 100 200 300 400 500 600 700 800 900 1000 5000 10000 15000 20000 25000 30000 35000 40000 45000 50000 40Q 15000+10Q 15000 + 10Q = 40Q 15000= 30Q 500

BEP: Three Machines The beak-even point for 3 machines is 667 500<=Demand <= 667  Produce up to 600 using 2 machines Otherwise  Three machines 100 200 300 400 500 600 700 800 900 1000 5000 10000 15000 20000 25000 30000 35000 40000 45000 50000 40Q 20000+10Q 20000 + 10Q = 40Q 20000= 30Q 667

Executive Summary Q<= 500  DoNothing 500<Q<=667  Buy two machines and produce 500< Q<= 600 Q>667  Buy three machines and produce 667<Q<=900 Now it is to Marketing Department to provide executive summary regarding the demand

Strategic Positioning of CSUN If we take the quality of the education you get at CSUN and divide it by its cost for you and your parents, then CSUN is ranked among top Universities in the Nation. U C P Quality  Cost 

Student Contribution However, quality of education at CSUN largely depends on the students. Are you getting the highest quality education? Perhaps we can test this hypothesis. Please go back to the previous slides. We have made a mistake. If you can find out the mistake, then perhaps You are saving lots and lots of money for your parents, at the same time, you are among the best undergraduate students in the Nation.

Maximum Profit With Two Machine 100 200 300 400 500 600 700 800 900 1000 5000 10000 15000 20000 25000 30000 35000 40000 45000 50000 TC = 15000 + 10(600) TC = 21000 TR = 40(600) = 24000 Profit = 24000-21000 = 3000 40Q } 15000+10Q You do not switch to 3 machines unless you make 3000 profit

Wrong Recommendation Q<= 500  DoNothing 500<Q<=667  Buy two machines and produce 500<Q<= 600 Q>667  Buy three machines and produce 667<Q<=900 At Q = 667 you make 0 profit with 3 machines 20000 + 10Q = 40Q 20000= 30Q Q = 667 20000 + 10Q +3000= 40Q 23000= 30Q Q = 767

Executive Summary Q<= 500  DoNothing 500<Q<=767  Buy two machines and produce 500<Q<= 600 Q>767  Buy three machines and produce 767<Q<=900 Now it is to Marketing Department to provide executive summary regarding the demand