Company producing custom-made teddy bears

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Reference no: EM132247120

a. List all the assumptions you are making. These should be reasonable assumptions.

b. Provide a justification for the assumptions you are making.

A company producing custom-made teddy bears is considering several options for expanding their existing capacity. There are 3 possibilities. The first is a low-end machine, which would take 10 minutes/bear for the (machined) manufacturing process. In addition, an average of 30 minutes of detail work would have to be done by hand (per bear). The second option is a high-end machine, which would take 8 minutes/bear, and reduce the amount of hand detail work to 25 minutes/bear. The final option is to subcontract out the bears. The subcontractor is willing to provide up to 400 bears per year for a flat fee of $2,000. Additional bears would cost $8 each. There is no difference in bear quality between the 3 options. It costs $10,000 to buy the low-end machine. Yearly maintenance is $1,000. The purchase price for the high-end machine is $15,000, while maintenance is $2,200. Management estimates the cost for running a machine at $6/hour. Labor costs are $15/hour. Assume the factory runs 350 days/year for 8 hours/day. If you expect a yearly demand of 12,000 bears, which option is the cheapest over a 3-year time horizon?

Reference no: EM132247120

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