Question

A newly formed firm must decide on a plant location. There are two alternatives under consideration: locate near the major raw materials or locate near the major customers. Locating near the raw materials will result in lower fixed and variable costs than locating near the market, but the owners believe there would be a loss in sales volume because customers tend to favor local suppliers. Revenue per unit will be $172 in either case.

Omaha Kansas City
Annual fixed costs ($ millions) $1.0 $1.1
Variable cost per unit $30 $45
Expected annual demand (units) 9800 11,625

Required:
Using the above information, determine what the profit would be for Kansas City.

Answer 1

Profit for Kansas City = $376,375

Step-by-step explanation:

a) Data and Calculations:

Omaha Kansas City

Expected annual demand (units) 9,800 11,625

Annual fixed costs $1,000,000 $1,100,000

Variable cost per unit $30 $45 $294,000 $523,125

Total cost $1,294,000 $1,623,125

Revenue $1,685,600 $1,999,500

Profit $391,600 $376,375

From the above differential analysis, it appears that locating in Omaha would be better and more profitable than locating in Kansas City for the company. This is based on the fact that more profit ($15,225) will be generated with Omaha location than locating in Kansas City.