Plant Size and Flexibility

The plant that can produce an expected output level at the lowest possible cost is not always the optimal plant size. Consider the following situation. Although actual demand for a product is uncertain, it is expected to be 5,000 units per year. Two possible probability distributions for this demand are given in Figure 8.8. Distribution L exhibits a low degree of variability in demand, and distribution H indicates substantially higher variation in possible demand levels.

Now suppose that two plants can be employed to produce the required output. Plant A is quite specialized and is geared to produce a specified output at a low cost per unit. If more or

Plainfield Electronics: Single Versus Multiplant Operation

In this example, profit is maximized at a production level well beyond that at which average cost is minimized for a single plant. Profits are greater with four plants because output can then be produced at minimum cost.

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