Question

Honda motor company has four vehicle manufacturing plants in various parts of the country. It is considering producing its own batteries for the vehicles that it builds instead of purchasing them from outside vendors. It could build one centralized location with a cost of $1,500,000 and each battery would cost $100, including shipping. If it builds four battery manufacturing plants near the vehicle manufacturing plants, each battery plant would cost $500,000 each, but the battery cost would be $80. Show your work/Explain for parts a-d.

a. Assuming each plant would produce 5,000 batteries each (so the single centrally located plant would produce all 20,000 batteries), which option would have the lowest costs?

b. If the production of batteries increased to 8,000 batteries per plant (or 32,000 batteries for the one centrally located plant), which option has the lowest costs?

c. What is the break-even point in terms of batteries produced?

d. If currently Ford needs 20,000 batteries but plans on producing more cars in the near future (so it would need more batteries), what should be considered when deciding which plan to follow?

Answer 1

Total cost of setting up of central plant X = $ 15,00,000

Total cost of setting up of four plants Y = 4 * 5,00,000 = 20,00,000 $

Now ,

for production of 20000 batteries ,

for plant X, at rate $100/battery, cost = 20,000*100 = 20,00,000

for 4 plants , at the rate $ 80, cost of prodcution = 4 * 80 * 5000 = 16,00,000

The total cost of production for plant X = 20,00,000 + 15,00,000 = 35,00,000

The total cost of production for plant Y = 16,00,000+ 20,00,000 = 36,00,000

Thus prodcution through plant X, I.E centralised plant is lowest.

B) if production is increased to 8,000 i,e 32,000 for the centralised plant, then

The cost of production for plant X = 32,000 * 100 = 32,00,000

then The total cost of production for plant X = 32,00,000+ 15,00,000 = 47,00,000

The cost of production for plant Y = 8,000 * 4* 80 = 25,60,000

The total cost of production for plant Y = 25,60,000+ 20,00,000 = $ 45,60,000

thus the cost of prodction for plant y, i.e 4 decentralised plants is lower.

D) IF FORD IS currently producing 20,000 batteries and it increases its production, it has to follow the decentralised plan because for more production, it has the decentralised model is more cost effiecient.

C) Break even point in terms of batteries produced

for the plant X the break even would be = the cost of plant / the cost of each battery

= 15,00,000/100 = 15,000

for the plant Y, the four plants break even is = 20,00,000/ 80 = 25,000

Plant X has to produce 15,000

while four plants combinly have to produce 25,000 batteries