A newly formed firm must decide on a plant location. There are two alternatives

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 $184 in either case. Omaha Kansas City Annual fixed costs ($ millions) $ 1.1 $ 1.0 Variable cost per unit $ 34 $ 49 Expected annual demand (units) 10,100 10,700 Using the above information, determine which location would produce the greater profit. (Omit the "$" sign in your response.) would produce the greater gross profit of $ .

Explanation / Answer

Altrnative-1 Alterenative-2 Locating Locating Near Supplier Near customer Selling price per unit 184 184 Sales units 10100 10700 Sales revenue 1858400 1968800 Less: Variable cost 343400 524300 Less: Fixed cost 1100000 1000000 Gross Profit 415000 444500 Locating Near customer will produce greater profits

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