Suppose That a Manufacturing Plant Is Considering Contracting Out Some

Essay

Suppose that a manufacturing plant is considering contracting out some preventative maintenance work. For $2000 each year a firm would cover all breakdowns free of charge and provide preventative maintenance. Two other options exist that entail the use of regular employees however. The first is to skip preventative measures and simply fix breakdowns, which occur at a rate of 2/year. Each breakdown costs about $750 to fix. The final option is to divert excess labor capacity to preventative measures, which reduces the chance of a breakdown per year by Y% given X hours of preventative maintenance subject to Y=10X-X^2. If each preventative maintenance hour costs $50, which option should the firm choose?