Question

A manufacturing firm is considering two locations for a plant to produce a new product. The two locations have fixed and variable costs as follows: Atlanta: fixed costs (annual)= 80000, vairable costs (per unit)=20 Phoenix: fixed costs= 140000, variable costs = 16 1. At what annual output would the company be indifferent between the two locations? 10,000 units 20,000 units 4,000 units 15,000 units 60,000 units 2. What would the total annual costs be for the Phoenix location with an annual output of 10,000 units? $140,000 $220,000 $280,000 $300,000 $156,000 3. What would be the total annual costs at the point of indifference? $300,000 $760,000 $240,000 $380,000 $220,000 4. If annual demand is estimated to be 20,000 units, which location should the company select? either Atlanta or Phoenix reject both Atlanta and Phoenix Phoenix Atlanta build at both locations 5. If the annual demand will be 20,000 units, what would be the cost advantage of the better location?
a. $60,000
b. $460,000
c. $20,000
d. $480,000
e. $80,000

Answer 1

Answer:

1 company to be in different is  15000 units

2 cost =  approximate  $300000

3 Total annual costs  = approximate $380,000

4  cost is less for phoenix and  Phoenix is the ideal location

5 Cost advantage = $18,000 so closed to $20000

Explanation:

given data

Atlanta fixed costs (annual) = 80000

variable costs (per unit) = 20

Phoenix  fixed costs = 140000

variable costs = 16

solution

we consider here output level = x

and price will be = p

so here profit for location will be

profit = Revenue - Variable Cost - Fixed costs   .............1

so here Atlanta profit is  

Profit = px - 20x - 80000     ..................2

and Phoenix profit is  

Profit = px - 16.1x - 140,000      ...................3

so now company to be in different is  

px - 20x - 80000 = px - 16.1x - 140,000

solve we get x here

x =  15,384.62  = 15000 units

and  

and now annual costs for phoenix will be as

annual cost =  Variable cost + Fixed     ...........4

cost = 16.1 × 10,000 + 140,000

cost = 161,000 + 140,000

cost = $301,000 = approximate  $300000

and

Total annual costs will be as

Total annual costs = 20 × 15,384.62 + 80,000

Total annual costs = $387,692.3 = approximate $380,000  

and

Annual demand = 20,000 units

so  

Cost for Atlanta  = 20 × 20000 + 80,000

Cost for Atlanta  = $480,000

Cost for Phoenix = 16.1 × 20000 + 140,000

Cost for Phoenix = $462,000

so cost is less for phoenix and  Phoenix is the ideal location

and

now Cost advantage will be

Cost advantage  = $480,000 - 462,000

Cost advantage = $18,000 so closed to $20000