Quant

Electric Car

Determining capacity level for production of new car

One unit of capacity has the potential to build one car

Costs per unit of capacity per year

Building

$2,000

Maintenance

$400

Unit selling price

$14,000

Unit variable cost

$10,000

Annual demand (normal)

Mean

500000

Stdev

100000

Capacity levels being considered

Capacity level

300000

400000

500000

600000

700000

Simulation model

Year 1

Year 2

Year 3

Year 4

Year 5

Demand

Production

Building cost

Maintenance cost

Revenue

Variable cost

Profit

fall 2008

We are trying to determine the proper capacity level for a new electric car. Below are the details of the problem. A unit of capacity gives us the potential to produce one car per year. Production of a car is dependent upon demand and capacity. A car will only be produced if there is demand AND enough capacity. It costs $10,000 to build a unit of capacity and the cost is charged equally over the next 5 years ($2,000 a year). It also costs $400 per year to maintain a unit of capacity (whether or not it is used). Each car sells for $14,000 and incurs a variable production cost of $10,000. The annual demand for the electric car during each of the next 5 years is believed to be normally distributed with mean 500,000 and standard deviation 100,000. The demands during different years are assumed to be independent. We are working with a 5-year planning horizon. Capacity levels of 300,000, 400,000, 500,000, 600,000 and 700,000 are under consideration.   Determine the best capacity level, using profit as your target to analyze.

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