A firm that has recently experienced an enormous growth rate is seeking to lease
ID: 335343 • Letter: A
Question
A firm that has recently experienced an enormous growth rate is seeking to lease a small plant in Memphis, TN; Biloxi, MS; or Birmingham, AL. Prepare an economic analysis of the three locations given the following information: Annual costs for building, equipment, and administration would be $38,200 for Memphis, $60,000 for Biloxi, and $100,000 for Birmingham. Labor and materials are expected to be $8 per unit in Memphis, $4 per unit in Biloxi, and $5 per unit in Birmingham. The Memphis location would increase system transportation costs by $50,000 per year, the Biloxi location by $60,000 per year, and the Birmingham location by $21,400 per year. Expected annual volume is 15,000 units.(Omit the "$" sign in your response.)
Explanation / Answer
Memphis, TN
Total annual cost = Annual cost for building, equipment and admin + Labor and material cost * Expected annual volume + Transportation cost increase
= 38200 + 8*15000 + 50000
= 208,200
_____________________
Biloxi, MS
Total annual cost = Annual cost for building, equipment and admin + Labor and material cost * Expected annual volume + Transportation cost increase
= 60000 + 4*15000 + 60000
= 180,000
_____________________
Birmingham, AL
Total annual cost = Annual cost for building, equipment and admin + Labor and material cost * Expected annual volume + Transportation cost increase
= 100000 + 5*15000 + 21400
= 196,400
Total cost of Biloxi location is the lowest. Therefore, it is the best location from economic perspective.
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