Tuesday, March 22, 2011

Cost and Economic Decision Making

The automobile industry is in a drive to reduce the weight of an automobile in order to meet CAFE regulations and to meet consumer demand for more fuel efficient cars and trucks. In order to do this, automobile manufacturers are looking to reduce the weight of the typical automobile. That means using different materials and one of those is the potential substitution from steel to aluminum. Yet making this type of decision is not that simple, and here is where the cost economics comes into play. Aluminum is lighter than steel and thus yields lower vehicle weights, but it is also more expensive than steel. The firms need to figure out the optimal combination of aluminum and steel in order to meet the demands within the marketplace, and also need to take into consideration if they change from steel to aluminum, then this will impact the firms fixed costs and overall profitability.

No comments: