Sarah has a startup business that makes two distinct bird feeders that she has designed. Sarah is planning on operating a small factory to build the bird feeders. She is looking at two possible locations, A and B. If she chooses location A, the lease on the building will be higher than location B, thus leading to higher fixed costs than what she would have with location B. However, if she makes more than 20,000 units, both locations will likely have to be expanded, both the physical buildings and the manufacturing equipment. Variable costs to produce each unit will vary by location as well as by product. For example, the first design will have variable costs of $10 and $15 in locations A and B respectively, while the second bird feeder design will have variable costs of $20 and $25 respectively depending on location. However, she thinks that variable costs will decrease if she sells more than 5,000 units, as she will receive discounts from her suppliers at that point. She is unsure of what demand will be exactly each year, she estimates she could sell between 10,000 and 50,000 total units per year. Sarah wants to determine which location to choose for the factory. She thinks a cost-profit-volume analysis might be the right tool to use to compare the two possible facilities, but she is unsure. For the four assumptions of the locational cost-profit-volume analysis discussed in class, discuss whether they are likely valid or invalid in this scenario, providing a justification for your conclusion. Based on this, discuss whether it would make sense to do a cost-profit-volume analysis in this scenario
Sarah has a startup business that makes two distinct bird feeders that she has designed. Sarah is planning on operating a small factory to build the bird feeders. She is looking at two possible locations, A and B. If she chooses location A, the lease on the building will be higher than location B, thus leading to higher fixed costs than what she would have with location B. However, if she makes more than 20,000 units, both locations will likely have to be expanded, both the physical buildings and the manufacturing equipment. Variable costs to produce each unit will vary by location as well as by product. For example, the first design will have variable costs of $10 and $15 in locations A and B respectively, while the second bird feeder design will have variable costs of $20 and $25 respectively depending on location. However, she thinks that variable costs will decrease if she sells more than 5,000 units, as she will receive discounts from her suppliers at that point. She is unsure of what demand will be exactly each year, she estimates she could sell between 10,000 and 50,000 total units per year.
Sarah wants to determine which location to choose for the factory. She thinks a cost-profit-volume analysis might be the right tool to use to compare the two possible facilities, but she is unsure.
For the four assumptions of the locational cost-profit-volume analysis discussed in class, discuss whether they are likely valid or invalid in this scenario, providing a justification for your conclusion. Based on this, discuss whether it would make sense to do a cost-profit-volume analysis in this scenario.
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