Problem 5 Chapter 6 on Production An American company that s

Problem #5, Chapter 6 on Production

An American company that sells consumer electronics products has manufacturing facilities in Mexico, Taiwan, and Canada. The average hourly wage, output, and annual overhead cost for each site are as follows:

                                                          Mexico            Taiwan            Canada

             Hourly wage rate                    $1.50               $3.00              $6.00

             Output per person                       10                   18                   20

             Fixed overhead cost             $150,000          $90,000          $110,000

1.      Given these figures, is the firm currently allocating its production resources optimally? If not, why do you think so? Consider output per person as a proxy for marginal product.

2.      Suppose the firm wants to consolidate all of its manufacturing into one facility. Where should it locate? Is there any difference in treating cost information between (1) and (2)?

3.      In deciding to consolidate its manufacturing into one facility, what are other factors the firm needs to consider? Please list and explain your reasons.

4.      Nike outsources its manufacturing operation whereas New Balance does not.

In terms of marginal productivity (output per person) and hourly wage rate, explain why New Balance did not outsource its production whereas Nike did briefly.

Solution

, it is a sufficient and necessary condition of optimal allocation that each department has an equal distribution of marginal output.and in our question this case is not holding.thats why firm is not allocating optimally.

b. If the firm is consolidating its manufacturing into one facility the firm will opearte where she has highest return .by reducing the amount of allocation of departments with smaller and give them to departments with larger . When of all departments are equal, we get the optimal allocation scheme.It will locate it in Taiwan

yeas in first case we just need hourly wage rate and MP but in second we use cost information.

c... factors whuch firm needs to consider are  invested capital, labor, materials, production schedules etc.