Eddie & Company: Exceeding the
Relevant Range
Eddie & Company is a small manufacturer located in the NorthCentral part of the United
States. The company manufactures auto and truck axles forautomobile producers. Most
of its output is sold to one of the larger auto companies. Becauseits sales have recently
increased beyond all expectation, that company now wants Eddie& Company to increase
its production level to satisfy the increased demand.
This request poses a serious dilemma for the owners of Eddie &Company. It would
have to considerably increase production in order to ship moreaxles to the automaker.
However, it has already been operating at full capacity just tomeet the demands of its
customers, including the automaker, when sales were low. The onlyways to satisfy the
increased demand would be (1) to buy the needed new products fromits competitors
and resell them to the automaker—at no profit—or (2) to increaseits own production
capacity in order to satisfy the demand.
The first alternative would satisfy the short-run increase indemand, but not the
long-range one. But the second alternative of increasing productioncapacity would pose
different problems. First, there is no assurance that theincreased demand from the auto-
maker will be permanent, and Eddie & Company could find itselfwith unused capacity.
Second, this alternative would mean increased fixed expenses,which would raise the
company’s break-even point. And this increase would continue evenif the automaker cut
back its orders to the original level.
1.What options are available to the company?
2. What would you do if you faced the same situation?
3. Would you buy the product from your competitor to meet thecontract? Explain.
4. Would you add the additional capacity? Explain.
