Question

A newly formed firm must decide on a plant location. There are two alternatives under consideration: locate near the major raw materials or locate near the major customers. Locating near the raw materials will result in lower fixed and variable costs than locating near the market, but the owners believe there would be a loss in sales volume because customers tend to favor local suppliers. Revenue per unit will be $170 in either case.Omaha Kansas CityAnnual fixed costs ($ millions) $ 0.9 $ 1.0 Variable cost per unit $ 20 $ 35 Expected annual demand (units) 9,400 10,000 Using the above information, determine which location would produce the greater profit. (Omit the "$" sign in your response.)________________ would produce the greater gross profit of $ _______________________________

Answer 1

Answer:

Omaha would produce a higher Income.

Explanation:

170 Sales revenue per unit

Omaha

$Sales \: Revenue - Variable \: Cost = Contribution \: Margin$

170 - 20 = 150

$Contribution \: per \: unit \times units \: sold = Total \: Contribution \: Margin$

9,400 x 150 = 1,410,000

fixed cost (900,000)

Income 510,000

Kansas City

$Sales \: Revenue - Variable \: Cost = Contribution \: Margin$

170 - 35 = 135

$Contribution \: per \: unit \times units \: sold = Total \: Contribution \: Margin$

10,000 x 135 = 1,350,000

fixed cost (1,000,000)

Income 350,000