Dennison Manufacturing makes large helical springs used in aircraft landing gear

Question

Dennison Manufacturing makes large helical springs used in aircraft landing gear. The company has narrowed its potential choices for its new manufacturing facility to four cities. The following information is known about the manufacturing and shipping costs of locating in each of these four cities: Use break-even point analysis to determine where Darren should locate. Based solely on break-even quantity, if Darren's manufacturing forecast for the foreseeable future is 5,000 units annually, where should he locate? Given the quantity of 5,000 units per year, the best choice is

Explanation / Answer

Fixed Costs per year Variable Manufacturing Costs per unit Variable Shipping Costs per unit Total Variable Costs a b c d = b+c Atlanta $300,000 $70 $5 $75 Phoenix $550,000 $51 $4 $55 Buffalo $1,600,000 $37 $2 $39 Seattle $1,850,000 $37 $5 $42 Between Seattle and Buffolo, Buffalo will be chosen as Seattle has higher fixed costs and variable costs as compared to Buffalo Break Even Point Analysis will be done taking locations with lowest fixed costs Indifference Point between Atlanta and Phoenix = Change in Fixed Costs / Change in Variable Costs = (550000 - 300000) / (75 - 55) = 250000 / 20 = 12500 units Indifference Point between Phoenix and Buffalo = Change in Fixed Costs / Change in Variable Costs = (1600000 - 550000) / (55 - 39) = 1050000 / 16 = 65625 units Less than 12500 units - Atlanta Between 12500 units to 65625 units - Phoenix More than 65625 units - Buffalo b. Atlanta as this is cheapest till 12500 units

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