Question

A manufacturing company preparing to build a new plant is considering three potential locations for it. The fixed and variable costs for the three alternative locations are presented below.

a. complete a numeric locational cost-volume analysis



b. Indicate over what range each of the alternatives A, B, C is the low-cost choice



c. Is any alternative never perferred? Explain




Cost A B C




Fixed ($) 2,500,000 2,000,000 3,500,000



Vaiable ($ per unit) 21 25 15

Answer 1

Step-by-step explanation:

Total cost is equal to fixed cost (the cost that does not vary with the amount of products manufactured) + variable cost

Fixed cost in this case, is the cost of building a new plant in either location.

The volume of production of this manufacturing company should be given but since it is absent, we will assume a uniform volume which is 50 units. This is quantity or number of products manufactured.

From the information provided in the question, we can derive the total cost function for each location.

Location A

TC = $2,500,000 + $21Q

Location B

TC = $2,000,000 + $25Q

Location C

TC = $3,500,000 + $15Q

Testing the level of total cost for each location, we can use the uniform quantity of 50 units. This will fetch the following levels of total cost for the locations:

Location A - $2,501,050

Location B - $2,001,250

Location C - $3,500,750

From this, we can tell the costliest location is LOCATION C. The low-cost choice is LOCATION B.

If in actual fact, the quantity of products produced in each location is different, not uniform, use the different quantities to calculate the total cost of producing at each location.