XAMPLE 17.12 Multiple Mutually Exclusive Alternatives Conspicuous Consumption Toys has a short-term (»1 year) need for a part that will be included in this year’s fad toy. The part can be purchased, or it can be produced through either a capital- or a labor-intensive process. The expected volume is 8000 units, with a lower limit of 70% and an upper limit of 120%. The purchase price for 8000 units is estimated to be $50 per part ±10%. For each 10% increase or decrease in the quantity, the expected price will change by 2.5%. The price falls if the quantity increases.
EXAMPLE 17.12 Multiple Mutually Exclusive Alternatives
Conspicuous Consumption Toys has a short-term (»1 year) need for a part that will be included in this year’s fad toy. The part can be purchased, or it can be produced through either a capital- or a labor-intensive process.
The expected volume is 8000 units, with a lower limit of 70% and an upper limit of 120%. The purchase price for 8000 units is estimated to be $50 per part ±10%. For each 10% increase or decrease in the quantity, the expected price will change by 2.5%. The price falls if the quantity increases.
The labor-intensive process will cost $40 per part for labor (±20%) and $50,000 in capital improvements, with no salvage value. The capital-intensive process will cost $400,000, with a lower limit of 95% and an upper limit of 115%. These capital expenditures also have no salvage value. The capital-intensive process also requires $5 per part in labor.
Construct a spiderplot using cost per part as the y-axis.
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