Advise Jim Beierlein to implement Alternative
Case 3.2
If you where Skip Grenoble, which alternative would you advise Jim Beierlein to implement? What Criteria would you use to arrive at your decision?
At what level of demand (in pounds) per year would these two alternatives be equal?
Graphically represent these two alternatives and their tradeoff point.
If I were Skip Grenoble, I would advise Jim Beierlein to implement Alternative 2, which involves purchasing the new machine. To arrive at this decision, I would consider several criteria, including cost savings, production capacity, and long-term benefits.
Cost Savings: Alternative 2 offers a significant cost-saving opportunity compared to Alternative 1. By purchasing the new machine, Jim can save $10 per unit in production costs. This cost reduction can have a substantial impact on the company’s profitability in the long run.
Production Capacity: Alternative 1 only allows Jim to produce up to 100,000 pounds per year. In contrast, Alternative 2 enables him to produce up to 200,000 pounds per year. The increased production capacity can help the company meet growing demand and potentially expand its customer base.
Long-Term Benefits: Investing in the new machine not only provides immediate cost savings but also offers long-term benefits. With the ability to produce more units, the company can take advantage of economies of scale, potentially reducing costs further. Additionally, increased production capacity can lead to higher revenue and market share.
To determine the level of demand (in pounds) per year at which these two alternatives would be equal, we need to set up an equation:
Alternative 1: $0.10Q + $50,000 = $0.30Q Alternative 2: $0.10Q + $200,000 = $0.20Q
Simplifying these equations:
Alternative 1: $50,000 = $0.20Q Alternative 2: $200,000 = $0.10Q
Solving for Q in each equation:
Alternative 1: Q = $50,000 / $0.20 = 250,000 pounds per year Alternative 2: Q = $200,000 / $0.10 = 2,000,000 pounds per year
Therefore, at a demand level of 250,000 pounds per year, these two alternatives would be equal.
Graphically representing these two alternatives and their tradeoff point:
On the x-axis, we have the quantity of pounds produced per year (Q), and on the y-axis, we have the total cost ($).
Alternative 1:
The total cost starts at $50,000 (fixed cost).
The variable cost per unit is $0.10.
The total cost increases linearly with production quantity at a rate of $0.10 per pound.
Alternative 2:
The total cost starts at $200,000 (fixed cost).
The variable cost per unit is $0.10.
The total cost increases linearly with production quantity at a rate of $0.20 per pound.
The tradeoff point occurs when the two cost lines intersect. This intersection represents the level of demand (in pounds) per year at which the two alternatives have equal costs.
By plotting these lines on a graph, we can visually determine the tradeoff point and make informed decisions based on the company’s expected demand and financial goals.