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: The locations area: Atlanta ($80,000, $20) and Phoenix ($140,000, $16) . The first number with in the parentheses is the fixed cost and the second number is the variable cost per unit If the annual demand is 20,000 units, what would be the cost advantage of the better location? Select one: A. $60,000 B. $80,000 C. $480,000 D. $20,000 E. $460,000

Answer 1

D. $20,000

Step-by-step explanation:

Considering the cost elements of Atlanta

Fixed cost = $80,000

Variable cost per unit = $20

Where 20,000 units are produced (to meet annual demands)

Total cost = 80,000 + (20000 × 20)

= 80,000 + 400,000

= $480,000

Considering the cost elements of Phoenix

Fixed cost = $140,000

Variable cost per unit = $16

Where 20,000 units are produced (to meet annual demands)

Total cost = 140,000 + (20000 × 16)

= 140,000 + 320,000

= $460,000

Comparing the cost of production in the two locations, the cost advantage of the better location (Phoenix)

= 480,000 - 460,000

= $20,000