Decision Analysis- Task 1

Decision Analysis- Task 1

Memorandum

Having been asked to recommend which method of production Shuzworld should use, in terms of equipment, for manufacturing of its sneakers I recommend Shuzworld should purchase new equipment. This is based on my analysis comparing the reconditioning of old equipment verses the purchasing of new equipment or that of outsourcing the operation. In doing this I took into account the both cost types that of fixed costs and variable costs. So that I could use the breakeven cost volume analysis tool I had to consider all variable costs as a constant with the relationship between those two costs as linear and not exponential.

In my analysis I use consistent costs with differing scenarios which allow the use of POM for Windows to be used to assist in this decision. Using this I noted the inputs for all three options under consideration. The information for both fixed and variable costs was derived from information shared by Alistair Wu and Angela Down. Using further information obtain via Alistair Wu I set the volume to 1000 sneakers as a starting point. The information shared shows fixed costs for reconditioning is $50,000 with $1,000,000 spent in variable costs being that anticipated expense to 1.5 million dollars. The purchase of new equipment has a fixed expense of $200,000 but the variable costs drop to half that of reconditioning at only $500,000 giving a total cost of $700,000. With outsourcing there is no initial expense so no fixed cost but the variable costs have a dramatic increase at 3 million dollars. This would be two times the cost of reconditioning and 4 times the cost of purchasing new equipment.

This data then leads to one conclusion for the company that of purchasing new equipment as the company will save money by choosing this path. It is true that the fixed costs are higher but the saving in variable costs make up for that difference. Below is a chart provided by the analysis tool I used with the output given. This crossover chart shows the breakeven point, fixed and variable costs in linear fashion which also illustrates the option of buying new to be a better fiscal decision. I chose the breakeven cost volume analysis toll because it has parameters to account for differing types of cost and multiple options. Here I have both fixed and variable costs for 3 different scenario choices. This tool lets me construct this cross over chart which shows the points at which one option shows an advantage over one or more of the others thus allowing us to see, based on our predictions for volume, which option will be more profitable for us. Looking at this chart you can see that with volume under 25 units the least cost is with outsources, once that 25 unit line has been crossed however the least costing method is reconditioning, which remains until we get to 300 units when from that point on purchasing new equipment becomes the most ...