Assignment 3: Problem 1
A firm plans to begin production of a new small appliance.
Management should decide whether to make the small engine of
this product in-plant, or buy it from an outside source.
If management decide to make the engine, then there are 2 alternatives
(1) To built it with a simple manufacturing system, or
(2) To built it with an advanced manufacturing system.
The fixed cost of alternative (1) is 10,000$ / year and its variable cost
is 8$ per unit.
The fixed cost of alternative (2) is 30,000$ / year and its variable cost
is 5$ per unit.
Purchase price of the engine is 10$ per unit.
1
BEP for 3 Alternatives and Summary
Prepare a table similar to the following table, to summarize your
recommendations
Demand
Recommendation
Q <= ?
?
?<Q<=?
?
?<Q
?
2
Purchasing vs. Manufacturing I
100000
90000
80000
70000
60000
10000+8Q=10Q
2Q=10000
50000
40000
30000
20000
10000
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
Q=5000
3
Manufacturing I vs. Manufacturing II
100000
90000
80000
70000
60000
10000+8Q=30000+5Q
3Q=20000
50000
40000
30000
20000
10000
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
Q=6667
4
Executive Summary
We summarize our recommendations as
Demand
Recommendation
Q <= 5000
Buy
5000 < Q < = 6667
Manufacture Alternative I
6667 < Q
Manufacture Alternative II
5
Assignment 3: Problem 2
A manager has the option of purchasing 1, 2, or 3 machine
Capacity of each machine is 300 units.
Fixed costs are as follows
Number of Machines
1
2
3
Fixed cost
9600
15000
20000
Total Capacity
1-300
300-600
600-900
Variable cost is 10$ per unit, sales price of product is 40$ per
unit
Tell management what to do
6
BEP for 3 Alternatives and Summary
Prepare an executive summary
Q<= ?  ?
?<Q<=?  ?
Q>?
?
7
BEP: One Machine
The beak-even point for 1 machine is 320
But one machine can not produce more than 300
50000
Demand
<= 300  No Production
45000
Otherwise
 Consider two machines
40000
35000
30000
25000
20000
15000
9600 + 10Q = 40Q
9600= 30Q
10000
5000
100
200
300
400
500
600
700
800
900
1000
320
8
BEP: Two Machines
The beak-even point for 2 machines is 500
Demand <= 500  No Production
50000
Otherwise
 Two machines and consider three machines
45000
40000
35000
30000
25000
20000
15000
15000 + 10Q = 40Q
15000= 30Q
10000
5000
100
200
300
400
500
600
500
700
800
900
1000
9
BEP: Three Machines
The beak-even point for 3 machines is 667
500<=Demand <= 667  Produce up to 600 using 2 machines
50000
Otherwise
 Three machines
45000
40000
35000
30000
25000
20000
15000
20000 + 10Q = 40Q
20000= 30Q
10000
5000
100
200
300
400
500
600
700
800
900
1000
667
10
Executive Summary
Q<= 500  DoNothing
500<Q<=667  Buy two machines and produce 500< Q<= 600
Q>667  Buy three machines and produce 667<Q<=900
Now it is to Marketing Department to provide executive summary
regarding the demand
11
Strategic Positioning of CSUN
If we take the quality of the education you get at CSUN and
divide it by its cost for you and your parents, then CSUN is
ranked among top Universities in the Nation.
U
Quality 
C
P
Cost 
12
Student Contribution
However, quality of education at CSUN largely depends on the
students.
Are you getting the highest quality education?
Perhaps we can test this hypothesis.
Please go back to the previous slides.
We have made a mistake.
If you can find out the mistake, then perhaps
You are saving lots and lots of money for your parents, at the
same time, you are among the best undergraduate students in the
Nation.
13
Maximum Profit With Two Machine
50000
45000
TC = 15000 + 10(600)
TC = 21000
TR = 40(600) = 24000
Profit = 24000-21000 = 3000
40000
35000
30000
25000
}
20000
You do not switch to 3
machines unless you make
3000 profit
15000
10000
5000
100
200
300
400
500
600
700
800
900
1000
14
Wrong Recommendation
Q<= 500  DoNothing
500<Q<=667  Buy two machines and produce 500<Q<= 600
Q>667  Buy three machines and produce 667<Q<=900
At Q = 667 you make 0 profit with 3 machines
20000 + 10Q = 40Q
20000= 30Q
Q = 667
20000 + 10Q +3000= 40Q
23000= 30Q
Q = 767
15
Executive Summary
Q<= 500  DoNothing
500<Q<=767  Buy two machines and produce 500<Q<= 600
Q>767  Buy three machines and produce 767<Q<=900
Now it is to Marketing Department to provide executive summary
regarding the demand
16