Question

A manufacturing film is considering two location for a plant to produce a new product. the two locations have fixed and variables costs as follows: atlanta FC$80,000 , VC $20 Phoenix FC$140,000, VC $16.

If annual demand is estimated to be 20,000 units, which location should the company select for the plant?
a. Either Atlanta or Phoenix
b. Atlanta
c. Phoenix
d. Reject both Atlanta and Phoenix

Answer 1

After calculating the total costs for the Atlanta and Phoenix locations, it is found that Phoenix offers a lower total cost with the estimated annual demand of 20,000 units. Therefore, selecting the Phoenix location is advised.

Step-by-step explanation:

The question involves calculating and comparing the total costs of operation for manufacturing plants in two different locations to decide where to set up a new plant. The total cost includes both fixed costs (FC) and variable costs (VC) for each location. Fixed costs do not change with the level of output, whereas variable costs do. To find the total cost for each location, we multiply the variable cost per unit by the estimated annual demand and add the fixed cost.

For Atlanta: Total Cost = (VC x Quantity) + FC = ($20 x 20,000) + $80,000 = $480,000.

For Phoenix: Total Cost = (VC x Quantity) + FC = ($16 x 20,000) + $140,000 = $460,000.

Comparing the two total costs, we see that the Phoenix location has lower total costs with an annual demand of 20,000 units. Therefore, the company should select Phoenix for the new plant location. Option c. Phoenix is the correct answer to the question.