Question

A firm that has recently experienced an enormous growth rate is seeking to lease a small plant in Memphis, TN; Biloxi, MS; or Birmingham, AL. Prepare an economic analysis of the three locations given the following information: Annual costs for building, equipment, and administration would be $59,000 for Memphis, $69,000 for Biloxi, and $104,000 for Birmingham. Labor and materials are expected to be $7 per unit in Memphis, $5 per unit in Biloxi, and $5 per unit in Birmingham. The Memphis location would increase system transportation costs by $58,000 per year, the Biloxi location by $68,500 per year, and the Birmingham location by $25,400 per year. Expected annual volume is 14,400 units.

Answer 1

Answer:

Total cost for a location = Annual costs for building, equipment, and administration + Labor and materials cost per unit*expected annual volume + Increase in  transportation costs

Total cost for Memphis location = $59000 + $7*14400 + $58000

Total cost for Memphis location = $217,800

Total cost for Biloxi location = $69000 + $5*14400 + $68500

Total cost for Biloxi location = $209,500

Total cost for Birmingham location = $104000 + 5*14400 + $25400

Total cost for Birmingham location = $201,400

So, Birmingham location gives the lowest Annual Total Cost.