Accounting for Decision Making and Control 8th Edition by Jerold Zimmerman

Exercise 29

GRC
GRC currently manufactures and sells computer-controlled gear-cutting machines used by automobile companies to produce gears for car and truck transmissions and differentials. GRC has decided to produce gear-cutting machines that wind-powered, electric-generating turbine companies (e.g., Siemens and General Electric) will purchase to manufacture gear sets used in their turbines. Because of the tremendous torque generated by the 160-foot blades on the windmills, the gears in the electric power generators must be able to withstand unusually large forces. GRC has designed a gear-cutting machine to produce gears that can withstand such forces.
The following table describes the demand curve for the number of wind-powered turbine gear-cutting machines GRC expects to sell per year.
(Note: The demand curve in the table can be represented as P = 500 - 20Q)
GRC can produce its new gear-cutting machines for wind-powered turbines using one of two technologies. One technology (HI Automation) involves more capital investment but results in lower variable costs. The other technology (LO Automation) requires less capital investment but results in higher variable costs. The following table summarizes how the average costs of the two technologies vary with different production levels of wind-powered turbine gear-cutting machines.
(All numbers in thousands)
In other words, if five wind-powered turbine gear-cutting machines are produced, the average cost of each machine is $365 using the Hi Automation technology but only $295 if the Low Automation technology is used. On the other hand, if 10 machines are produced, the Hi Automation technology is less expensive ($245) than the Low Automation technology ($285). (Note: The average cost estimates above include the annual lease cost of the automation technology.)
Required:
a. Should GRC purchase the Hi Automation or the Low Automation technology? Justify your answer with convincing supporting analyses.
b. Given your choice of production technology (Hi or Low Automation) in part a , what price should GRC set for its gear-cutting machines for wind-powered turbines and how many machines will GRC expect to sell at this price?