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Assignment No. 1
Assignment No. 1
1. Sleekfon and Sturdyfon are two major cell phone manufacturers that have recently merged. Their
current market sizes are as shown in Table 1. All demand is in millions of unitsSleekfon has three
production facilities in Europe (EU), North America, and South America. Sturdyfon also has three
production facilities in Europe (EU), North America, and Rest of Asia/Australia. The capacity (in
millions of units), annual fixed cost (in millions of $), and variable production costs ($ per unit) for
each plant are as shown in Table 2.
Transportation costs between regions are as shown in Table 3. All transportation costs are shown
in $ per unit. Duties are applied on each unit based on the fixed cost per unit capacity, variable cost
per unit, and transportation cost. Thus, a unit currently shipped from North America to Africa has
a fixed cost per unit of capacity of $5.00, a variable production cost of $5.50, and a transportation
cost of $2.20. The 25 percent import duty is thus applied on $12.70 (5.00 + 5.50 + 2.20) to give a
total cost on import of $15.88. For the questions below, assume that market demand is as in Table
1. The merged company has estimated that scaling back a 20-million-unit plant to 10 million units
saves 30 percent in fixed costs. Variable costs at a scaled-back plant are unaffected. Shutting a
plant down (either 10 million or 20 million units) saves 80 percent in fixed costs. Fixed costs are
only partially recovered because of severance and other costs associated with a shutdown
a) What is the lowest cost achievable for the production and distribution network prior to the
merger? Which plants serve which markets?
b) What is the lowest cost achievable for the production and distribution network after the
merger if none of the plants is shut down? Which plants serve which markets?
c) What is the lowest cost achievable for the production anddistribution network after the
merger if plants can be scaled back or shut down in batches of 10 million units of capacity?
Which plants serve which markets?
d) How is the optimal network configuration affected if all duties are reduced to 0?
e) How should the merged network be configured?
2. DryIce, Inc., is a manufacturer of air conditioners that has seen its demand grow significantly. The
company anticipates nationwide demand for the next year to be 180,000 units in the South, 120,000
units in the Midwest, 110,000 units in the East, and 100,000 units in the West. Managers at DryIce
are designing the manufacturing network and have selected four potential sites—New York,
Atlanta, Chicago, and San Diego. Plants could have a capacity of either 200,000 or 400,000 units.
The annual fixed costs at the four locations are shown in Table 4, along with the cost of producing
and shipping an air conditioner to each of the four markets. Where should DryIce build its factories
and how large should they be?
In Dollars New York Atlanta Chicago San Diego
Annual fixed cost
6 million 5.5 million 5.6 million 6.1 million
of 200,000 plant
Annual fixed cost
10 million 9.2 million 9.3 million 10.2 million
of 400,000 plant
East 211 232 238 299