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 $185 in either case. Using the following information, determine which location would produce the greater profit.
Omaha Kansas City
Annual fixed costs ($ millions) $1.2 $1.4
Variable cost per unit $36 $47
Expected annual demand (units)8,000 12,000

Answer 1

Answer: Kansas City with a profit of $256,000

Explanation:

Omaha

Profit = Revenue - Fixed expenses - Variable expense

= Number of units * (Revenue - variable expenses) - Fixed cost

= 8,000 * (185 - 36) - 1,200,000

= -$8,000

Kansas City

= 12,000 * (185 - 47) - 1,400,000

= $256,000