Problem 1. During your first month as an employee at Greenfield Industries (a large drill- bit manufacturer), you are asked to evaluate alternatives for producing a newly designed drill bit on a turning machine. Your boss' memorandum to you has practically no information about what the alternatives are and what criteria should be used. The same task was posed to a previous employee who could not finish the analysis, but she has given you the following information: An old turning machine valued at $350,000 exists (in the warehouse) that can be modified for the new drill bit. The in-house technicians have given an estimate of $40,000 to modify this machine, and they assure you that they will have the machine ready before the projected start date (although they have never done any modifications of this type). It is hoped that the old turning machine will be able to meet production requirements at full capacity. An outside company, McDonald Inc., made the machine seven years ago and can easily do the same modifications for $60,000. The cooling system used for this machine is not environmentally safe and would require some disposal costs. McDonald Inc. has offered to build a new turning machine with more environmental safeguards and higher capacity for a price of $450,000. McDonald Inc. has promised this machine before the start up date and is willing to pay any late costs. Your company has $100,000 set aside for the start-up of the new product line of drill bits. For this situation, a. Define the problem. b. List key assumptions. c. List alternatives facing Greenfield Industries. d. Select a criterion for evaluation of alternatives. e. Introduce risk into this situation.
Problem 1. During your first month as an employee at Greenfield Industries (a large drill- bit manufacturer), you are asked to evaluate alternatives for producing a newly designed drill bit on a turning machine. Your boss' memorandum to you has practically no information about what the alternatives are and what criteria should be used. The same task was posed to a previous employee who could not finish the analysis, but she has given you the following information: An old turning machine valued at $350,000 exists (in the warehouse) that can be modified for the new drill bit. The in-house technicians have given an estimate of $40,000 to modify this machine, and they assure you that they will have the machine ready before the projected start date (although they have never done any modifications of this type). It is hoped that the old turning machine will be able to meet production requirements at full capacity. An outside company, McDonald Inc., made the machine seven years ago and can easily do the same modifications for $60,000. The cooling system used for this machine is not environmentally safe and would require some disposal costs. McDonald Inc. has offered to build a new turning machine with more environmental safeguards and higher capacity for a price of $450,000. McDonald Inc. has promised this machine before the start up date and is willing to pay any late costs. Your company has $100,000 set aside for the start-up of the new product line of drill bits. For this situation, a. Define the problem. b. List key assumptions. c. List alternatives facing Greenfield Industries. d. Select a criterion for evaluation of alternatives. e. Introduce risk into this situation.
Chapter1: Making Economics Decisions
Section: Chapter Questions
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Transcribed Image Text:Problem 1. During your first month as an employee at Greenfield Industries (a large drill-
bit manufacturer), you are asked to evaluate alternatives for producing a newly designed
drill bit on a turning machine. Your boss' memorandum to you has practically no information
about what the alternatives are and what criteria should be used. The same task was posed
to a previous employee who could not finish the analysis, but she has given you the following
information: An old turning machine valued at $350,000 exists (in the warehouse) that can
be modified for the new drill bit. The in-house technicians have given an estimate of
$40,000 to modify this machine, and they assure you that they will have the machine ready
before the projected start date (although they have never done any modifications of this
type). It is hoped that the old turning machine will be able to meet production requirements
at full capacity. An outside company, McDonald Inc., made the machine seven years ago and
can easily do the same modifications for $60,000. The cooling system used for this machine
is not environmentally safe and would require some disposal costs. McDonald Inc. has
offered to build a new turning machine with more environmental safeguards and higher
capacity for a price of $450,000. McDonald Inc. has promised this machine before the start
up date and is willing to pay any late costs. Your company has $100,000 set aside for the
start-up of the new product line of drill bits. For this situation,
a. Define the problem.
b. List key assumptions.
c. List alternatives facing Greenfield Industries.
d. Select a criterion for evaluation of alternatives.
e. Introduce risk into this situation.
f. Discuss how nonmonetary considerations may impact the selection.
g. Describe how a post audit could be performed.
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