A company that produces pleasure boats has decided to expand one of its lines. Current facilities are insufficient to handle the increased workload, so the company is considering three alternatives, A (new location), B (subcontract), and C (expand existing facilities). Alternative A would involve substantial fixed costs but relatively low variable costs: fixed costs would be $254,000 per year, and variable costs would be $500 per boat. Subcontracting would involve a cost per boat of $2,500 and fixed cost of $25,000 and expansion would require an annual fixed cost of $120,000 and a variable cost of $1,000 per boat. Which alternative would yield the lowest total cost for an expected annual volume of 150 boats?
A company that produces pleasure boats has decided to expand one of its lines. Current facilities are insufficient to handle the increased workload, so the company is considering three alternatives, A (new location), B (subcontract), and C (expand existing facilities).
Alternative A would involve substantial fixed costs but relatively low variable costs: fixed costs would be $254,000 per year, and variable costs would be $500 per boat. Subcontracting would involve a cost per boat of $2,500 and fixed cost of $25,000 and expansion would require an annual fixed cost of $120,000 and a variable cost of $1,000 per boat.
Which alternative would yield the lowest total cost for an expected annual volume of 150 boats?
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