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 compared to 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 $175 in either case. Using the following information, determine which location would produce the greater profit.

Omaha Kansas City
Annual fixed costs ($ millions) $1.0 $1.1
Variable cost per unit $25 $40
Expected annual demand (units) 9,650 10,250

Answer 1

Omaha have the greater profit

Step-by-step explanation:

The computation is shown below:

As we know that

Profit = Sales volume × (Revenue - variable cost) - fixed cost

Now applied the same for both the locations

For location Omaha, the profit is

= 9,650 × ($175 - $25) - $1,000,000

= $447,500

And, for Kansas, the profit is

= 10,250 × ($175 - $40) - $1,100,000

= $283,750

So as we can see that the Omaha have the greater profit so the same is relevant