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A newly formed firm must decide on a plant location. There are 2 alternatives under consideration: locate near the major raw materials of locate near the the major customers. Locating near the raw materials will result in lower fixed costs and variable costs than locating near the market, but the owners believe ther would be a loss in sales volume because customers tend to favor local suppliers. Revenue per unit will be $185 in either case. Using the following information, determine which location would produce greater profit.. Annual Fixed costs Omaha $1.2 million, Kansas City $1.4 million Variable cost per unit Omaha $26, Kansas City $47 Expected annual demand Omaha 8000 units, Kansas City 12000 units.

Question

A newly formed firm must decide on a plant location. There are 2 alternatives under consideration: locate near the major raw materials of locate near the the major customers. Locating near the raw materials will result in lower fixed costs and variable costs than locating near the market, but the owners believe ther would be a loss in sales volume because customers tend to favor local suppliers. Revenue per unit will be $185 in either case. Using the following information, determine which location would produce greater profit.. Annual Fixed costs Omaha $1.2 million, Kansas City $1.4 million Variable cost per unit Omaha $26, Kansas City $47 Expected annual demand Omaha 8000 units, Kansas City 12000 units.

check_circleAnswer
Step 1

Given information:

Revenue per unit (R)               = $185

City O:

Annual fixed cost (FC)                              = $1.2 million

Variable cost per unit (VC)                   = $26

Expected annual demand (D)             = 8,000 units

City K:

Annual fixed cost (FC)                            = $1.4 million

Variable cost per unit (VC)                   = $47

Expected annual demand (D)             = 12,000 units

Step 2

Calculation of profit:

City O:

 

Profit- (RxD)-FC+(VCXD)]
-(185x8,000)-1,200, 000 + (26 x8, 00 0)
=1, 480,000-1, 408,000
$72,000
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Image Transcriptionclose

Profit- (RxD)-FC+(VCXD)] -(185x8,000)-1,200, 000 + (26 x8, 00 0) =1, 480,000-1, 408,000 $72,000

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Step 3

Calculation of profit:

City K:

 

...
Profit- (RxD)-FC+(VCxD)]
=(185x12,000)-1.400,000+(47x12,000)
-2,220,000-1,964,000
=$256,000
help_outline

Image Transcriptionclose

Profit- (RxD)-FC+(VCxD)] =(185x12,000)-1.400,000+(47x12,000) -2,220,000-1,964,000 =$256,000

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