Ford is going to produce a new vehicle, the Pioneer, and wants to determine the amount of annual capacity it should build. Ford’s goal is to maximize the profit from this vehicle over the next 10 years. Each vehicle will sell for $13,000 and incur a variable production cost of $10,000. Building one unit of annual capacity will cost $3000. Each unit of capacity will also cost $1000 per year to maintain, even if the capacity is unused. Demand for the Pioneer is unknown but marketing estimates the distribution of annual demand to be as shown in the file P06_57.xlsx. Assume that the number of units sold during a year is the minimum of capacity and annual demand.
a. Explain why a capacity of 1,300,000 is not a good choice.
b. Which capacity level should Ford choose?