Precision Machine Company (PMC) produces computer parts for computer manufacturers. PMC’s production process consists of identical production cycles with the same length = 18 weeks. During the first 10 weeks (from week 1 to week 10) of an 18-weeks production cycle, PMC buys essential parts from a Japanese supplier, manufactures them into computer parts, and sells them to computer manufacturers. Unit manufacturing cost is $100. In each week, on average, approximately 50,000/week units of essential parts are supplied by the Japanese supplier (thus, 10 weeks total supply = 50,000/week ´ 10weeks). The company will choose between two production options.

(1) Expedited Production Option (EPO): The plant is configured to deal with a busier production schedule, and the throughput (flow rate) is 40,000 units per week. In the beginning of the production cycle, it costs PMC a Fix Setup Cost=$8,500,000 for setting up the EPO.

(2) Normal Production Option (NPO): The plant is configured to deal with a normal production schedule, and the throughput (flow rate) is 30,000 units per week. In the beginning of the production cycle, it costs PMC a Fix Setup Cost=$4,000,000 for setting up the NPO.

Because inflows (50,000 units/week) exceed outflows (EPO=40,000 units/week or NPO=30,000 units/week), it can be easily seen that inventory will build up. An inventory unit will cost the company Unit Inventory Cost=$5 per week (For example, If PMC keeps 2 units of inventory for 3 weeks, then the Inventory Cost = 2units´3weeks´$5). Moreover, PMC’s production policy specifies that all input essential parts during a production cycle must be processed before the end of the cycle, accordingly, the company begins with an empty part storeroom.

(a) Evaluate two options (EPO and NPO) and determine the minimum Total Cost Per Cycle (TCPC) option. Note that

TCPC = Fix Setup Cost + Inventory Cost + Manufacturing Cost

(b) PMC adopts EPO if Fix Setup Cost is no more than $X. Computes X.

(c) PMC adopts NPO if Unit Inventory Cost is no more than $X. Computes X.