# What is the break-even volume for assembling the stoves in-house? In Mexico?

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Question 1: (15 points)

You are the new CEO of DualJet, a U.S. company that makes premium kitchen stoves. You must decide whether to assemble the stoves in-house or to have a Mexican company do it. The fixed and variable costs as well as the capacity for each option are as follows:

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Fixed cost per year Variable cost Capacity
Assemble in-house \$55,000 \$620 35000
Contract with Mexican assembler \$0 \$700 50000

In addition, marketing has developed the following demand scenarios:

Yearly demand Probability
20000 stoves 10%
35000 stoves 60%
50000 stoves 30%

Finally, the stoves sell for \$2,500.

What is the break-even volume for assembling the stoves in-house? In Mexico?
At what volume do the two capacity options have identical costs?
Draw the decision tree and calculate the expected cost for each capacity alternative. Which alternative would you pick if you wanted to minimize expected cost?
Now calculate the expected profit for each capacity alternative. Which alternative would you pick if you wanted to maximize expected profit? Is your answer the same as part (c)? Would you recommend the cost-minimization or cost-maximization objective here?
Question 2: (10 points)

Wake County has a special emergency rescue team. The team is practicing rescuing dummies from a burning building. The first time the team took 4 minutes. The second time, they took 3 minutes.

Based on the information provided, what is the estimated learning rate?
Suppose the team’s learning rate is 80%. How many times will the team repeat the exercise until its time is less than 2 minutes?
How long will the team take for the 20th rescue assuming an 80% learning rate?