31 A company that produces pleasure boats has decided to exp

3.1

A company that produces pleasure boats has decided to expand one of its lines. Current facilities are insufficient to handle the increased workload, so the company is considering three alternatives, A (new location), B (subcontract), and C (expand existing facilities).

       Alternative A would involve substantial fixed costs but relatively low variable costs: fixed costs would be $315,300 per year, and variable costs would be $900 per boat. Subcontracting would involve a cost per boat of $2,100 and a fixed cost of $26,000, and expansion would require an annual fixed cost of $141,000 and a variable cost of $1,100 per boat.

       Expansion would result in an increase of $83,000 per year in transportation costs, subcontracting would result in an increase of $26,000 per year, and adding a new location would result in an increase of $5,300 per year.

Solution

Option B - Subcontracting