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 $189 in either case. Omaha Kansas City Annual fixed costs ($ millions) $ 1.0 $ 1.3 Variable cost per unit $ 30 $ 46 Expected annual demand (units) 9,400 10,850 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 $ 551550 . ReferenceseBook & Resources WorksheetDifficulty: 1 Easy Problem 8-1Learning Objective: 08-07 Use the techniques presented to evaluate location alternatives. Check my work

Explanation / Answer

As we can find, plant near raw materials is generating more profits. So, this option is preferable.

Calculations Particulars Near Raw Materials Near Customers A Quantity Sold 9400 10850 B = A x $189 Sales @$189 1776600 2050650 C = A x Respective Variable costs Less: Variable Costs 282000 499100 D = B - C Contribution 1494600 1551550 E Less: Fixed Costs 1000000 1300000 F = D - E Profit 494600 251550

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