The Operations Management

Operations Management
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Problem 1
a. Best alternative
When the demand is 7000 units, process II graph indicates the lowest cost of production.
It shows that the total production cost for process II will be $ 46,000 which is the lowest.
b. The intersection point B
Intersection point B is where the graph of buy and use process II meet.
The equation of the two graphs are
Process II : y =25000+3 x
Buy : y=7 x
Using the breakeven technique
25000+3 x=7 x
4 x=25000
x=6,250 units
Q=6,250units
c. Volume at intersection point A
Process II and Process I meet
Using breakeven technique
Process II : y =25000+3 x
process I : y=16000+ 5 x
25000+3 x=16000+5 x
9000=2 x
x=4500units
Volume at intersection point C
Process I and Buy meet

ProcessI : y =16000+ 5 x
Buy : y=7 x
Now
16000+5 x=7 x
2 x=16000
x=8000 units
Now A=4500 , B=6250 , c=8000
From 0 to 6250 units, he should choose the option to buy
Above 6250 units he should choose option of in-house production using process II.
d. The choice of in-house production using process I should never be selected. At the
intersection point B, buy and produce using process II have similar cost hence either can
be chosen. At this same intersection point in built production using process I is more
expensive hence is not an optimal choice.
Problem 2
a. Decision tree
b. Expected net present value
Buying one machine initially will have an expected net present value of $ 90,000
c. From the decision tree, buying two machines initially will have an expected net present
value of $113,500