Question

A firm is considering two location alternatives. At location A, fixed costs would be $4,000,000 per year, and variable costs $0.30 per unit. At alternative B, fixed costs would be $3,600,000 per year, with variable costs of $0.34 per unit. If annual demand is expected to be 9 million units, which plant offers the lowest total cost?

Answer 1

Answer:

Plant B

Explanation:

Total Demand = 9000000

Total Cost = Fix Cost + Variable Cost

Location A

Variable Cost = 9000000*0.3 = 2700000

Fix Cost                                      = 4000000

Total Cost                                  = 6700000

Location B

Variable Cost = 9000000*0.34 = 3060000  

Fix Cost                                      =  3600000

Total Cost                                  = 6660000

Plant B is feasible because it will Save $40000