1. Meile Machine Shop, Inc., has a 1-year contract to produce200,000 gear housings for a new off-road vehicle. Owner Larry Meile hopes the contract will be extended and the volume increased next year. Borges has developed costs for three alternatives. They are general-purpose equipment (GPE), flexible manufacturing system (FMS), and expensive, but efficient, dedicated machine (DM). The cost data follow:

	GENERALPURPOSE EQUIPMENT (GPE)	FLEXIBLEMANUFACTURING SYSTEM (FMS)	DEDICATED MACHINE (DM)
Annual contracted units	200,000	200,000	200,000
Annual fixed cost	$100,000	$200,000	$500,000
Per unit variable cost	$ 15.00	$ 14.00	$ 13.00

Which process is best for this contract? (3 marks)

2. Distinguish between design capacity and effective capacity. (1 mark)

3. What is efficiency? (1 mark)

4. An electronics firm is currently manufacturing an item that has a variable cost of $.50 per unit and a selling price of $1.00 per unit. Fixed costs are $14,000. Current volume is 30,000 units. The firm can substantially improve the product quality by adding a new piece of equipment at an additional fixed cost of $6,000. Variable cost would increase to $.60, but volume should jump to 50,000 units due to a higher-quality product.

Should the company buy the new equipment? (3 marks)

5. What are the advantages and disadvantages of product layout, and process layout? (2 marks)