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

To compare the economic feasibility of leasing a small plant in Memphis, TN; Biloxi, MS; and Birmingham, AL, we need to consider the costs and revenues associated with each location. By comparing the total costs for each location, we can determine which option is the most economically viable for the firm.

Step-by-step explanation:

To compare the economic feasibility of leasing a small plant in Memphis, TN; Biloxi, MS; and Birmingham, AL, we need to consider the costs and revenues associated with each location.

In Memphis, the annual costs for building, equipment, and administration are $59,000, and the labor and materials cost per unit is $7. Additionally, there is a transportation cost increase of $58,000 per year. Considering an expected annual volume of 14,400 units, we can calculate the total costs for Memphis.

In Biloxi, the annual costs for building, equipment, and administration are $69,000, and the labor and materials cost per unit is $5. The transportation cost increase is $68,500 per year. Using the expected annual volume, we can calculate the total costs for Biloxi.

In Birmingham, the annual costs for building, equipment, and administration are $104,000, and the labor and materials cost per unit is $5. The transportation cost increase is $25,400 per year. Using the expected annual volume, we can calculate the total costs for Birmingham.

By comparing the total costs for each location, we can determine which option is the most economically viable for the firm.

Answer 2

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.