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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