The plant upgrade option that reduces production run setup c

The plant upgrade option that reduces production run setup costs by 50% each year and costs 8 million per million pairs of plant capacity (which causes depreciation costs at the plant to rise by 5% of the capital cost of the upgrade) merits immediate and careful consideration by company managers when the company has 2 plants that have just been expanded to a capacity of 9 million pairs each as of Year 14 and when management expects to produce 50 models/styles at these two 9-million pair plants through Year 20 (production run setup costs are $1 million per year for 50 models/styles). the company built a 1 million-pair plant in Europe-Africa in Year 12 and the company\'s strategy calls for this plant to produce 350 models/styles (which entails annual production run setup costs of $10.5 million) every year through Year 20. they have decided as of Year 12 to build and operate a single plant of 15 million pairs In the Asia-Pacific to supply footwear to all four geographic regions

Solution

Doing an upgrade will allow the company to increase its production capacity. This production capacity will lead to more work for the workers.

Thus, the upgrade strategy can be fruitful only if the workers are ready to work for more hours. Workers can be made agreed to work if they get a salary hike.

Thus, the best fit option would be option d. i.e. they are committed to increase the base pay of plant workers by 5% annually and are looking for ways to reduce the production cost.