Operations Management
Module 2: Numerical Questions (Process Strategy)
Q1. Borges Machine Shop, Inc., has a 1-year contract for the production of 200,000 gear housings
for a new off-road vehicle. Owner Luis Borges hopes the contract will be extended and the volume
increased next year. Borges has developed costs for three alternatives. They are general-purpose
equipment (GPE), flexible manufacturing system (FMS), and expensive, but efficient, dedicated
machine (DM). The cost data follow:
a) Which process is best for this contract?
b) Determine the most economical volume for each process.
c) Determine the best process for each of the following volumes: (1) 75,000, (2) 275,000, and
(3) 375,000.
Q2. Ski Boards, Inc., wants to enter the market quickly with a new finish on its ski boards. It has
three choices: (a) Refurbish the old equipment at a cost of $800, (b) make major modifications at
a cost of $1,100, or (c) purchase new equipment at a net cost of $1,800. If the firm chooses to
refurbish the equipment, materials and labor will be $1.10 per board. If it chooses to make
modifications, materials and labor will be $0.70 per board. If it buys new equipment, variable
costs are estimated to be $0.40 per board.
a) Which alternative should Ski Boards, Inc., choose if it thinks it can sell more than 3,000
boards?
b) Which alternative should the firm use if it thinks the market for boards will be between
1,000 and 2,000?
Q3. Matthew Bailey, as manager of Designs by Bailey, is upgrading his CAD software. The high-
performance (HP) software rents for $3,000 per month per workstation. The standard-
performance (SP) software rents for $2,000 per month per workstation. The productivity figures
that he has available suggest that the HP software is faster for his kind of design. Therefore, with
the HP software he will need five engineers and with the SP software he will need six. This
translates into a variable cost of $200 per drawing for the HP system and $240 per drawing for
the SP system. At his projected volume of 80 drawings per month, which system should he rent?
Q4. California Gardens, Inc., prewashes, shreds, and distributes a variety of salad mixes in 2-
pound bags. Doug Voss, Operations VP, is considering a new Hi-Speed shredder to replace the
old machine, referred to in the shop as “Clunker.” Hi-Speed will have a fixed cost of $85,000 per
month and a variable cost of $1.25 per bag. Clunker has a fixed cost of only $44,000 per month,
but a variable cost of $1.75. Selling price is $2.50 per bag.
a) What is the crossover point in units (point of indifference) for the processes?
b) What is the monthly profit or loss if the company changes to the Hi-Speed shredder and
sells 60,000 bags per month?
c) What is the monthly profit or loss if the company stays with Clunker and sells 60,000 bags
per month?
Q5. Metters Cabinets, Inc., needs to choose a production method for its new office shelf, the
Maxistand. To help accomplish this, the firm has gathered the following production cost data:
Metters Cabinets projects an annual demand of 24,000 units for the Maxistand. The Maxistand
will sell for $120 per unit.
a) Which process type will maximize the annual profit from producing the Maxistand?
b) What is the value of this annual profit?
Q6. Pete Patel is the sports liaison for the student government association. During the fall
semester, the group promotes school spirit with “orange effect” T-shirts. The shirts feature a
special screen-printed logo that can be expensive to make. Pete’s supplier, Classic Tees, has
quoted three prices for the shirts with differing logo packages, as shown below.
a) If the T-shirts are sold for $6 each, how many shirts would have to be sold to break even
with Package l?
b) Pete is considering selling the shirts for $8 each. What is the break-even point for Packages
1 and 2 with an $8 price?
c) Which logo package would you recommend if Pete expects to sell 75 shirts? 200 shirts?
d) Assuming the shirts would be sold at the same price regardless of the logo package, create
a decision rule for Pete to use based on anticipated sales volume.
Dr. Navneet Bhatt