Bushra Company's three assembly plants are located in Abu Dhabi, Dubai and Sharjah. Previously, the company purchased a major subassembly, which becomes part of the final product from an outside firm. Bushra has decided to manufacture the subassemblies within the company and must now consider whither to rent one centrally located facility for example in Dubai, where all the subassemblies would be manufactured or to rent three separate facilities, each located near one of the assembly plants, where each facility would manufacture only the subassemblies needed for the nearby assembly plant.

A single, centrally located facility, with a product capacity of 18,000 units per year, would have fixed costs of AED. 900,000 per year and a variable cost of AED. 250 per unit. Three separate decentralized facilities, with product capacities of 8,000, 6,000 and 4,000 units per year, would have fixed costs of AED. 475,000, AED. 425,000 and AED. 400,000 respectively and variable costs per unit of only ED. 225 per unit, owing primarily to the reduction in shipping costs.The current product rates at the three assembly plants are 6,000. 4,500 and 3,000 units respectively.

QUESTIONS:

1.Assuming that the current production rates are maintained at the three assembly plants, which alternative should management select and why?

2.If demand for the final product were to increase to production capacity, which alternative would be more attractive? What additional information would be useful before making a decision?

3.Discuss the issues on how to analyze economies of scale, diseconomies of scale, economies of scope, and cost complementarities, and how each affects the cost of production with good examples.