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: Location FC (annual) VC (per unit) Atlanta $ 80,000 $ 20 Phoenix $ 140,000 $ 16 If the annual demand will be 20,000 units, what would be the cost advantage of the better location? HINT: Compare the total costs Select one: a. 40000 b. 20000 c. 460000 d. 60000

Answer 1

Cost Advantage of different locations:

b. $20,000

Phoenix certainly had a cost advantage over Atlanta and based on this factor, it should be chosen for the new plant instead of any other city.

Step-by-step explanation:

a) Total Costs of different locations:

Atlanta Phoenix

Fixed Cost $80,000 $140,000

Variable cost 400,000 320,000

Total Costs $480,000 $460,000

b) Variable costs

Atlanta Phoenix

Annual Demand 20,000 20,000

Variable cost/unit $20 $16

Total variable cost $400,000 $320,000

c) Cost Advantage is the competitive edge which location (or company) can have over another through reduced production or marketing costs or both so that it can offer cheaper prices or use excess profits to bolster promotion or distribution. In this case, the comparison is on the total cost, which is made of variable and fixed costs.