Two new locations are being considered for a new facility. They have annual fixe

Question

Two new locations are being considered for a new facility. They have annual fixed and variable costs as follows:

Location

Fixed Costs

Variable Costs (per unit)

Seattle

$280,000

$10/unit

Hong Kong

$460,000

$7/unit

1.At what quantity would the costs be the same for either location? [60,000 units/year]

2.What are the total costs at the point of indifference? [$880,000]

3.Which location is superior for an annual output of 120,000? [Hong Kong, total costs are less at $1,300,000]

4.How much money would be saved if the superior option identified in question #3 is chosen? Hint: compare the cost of each location at the given output [$180,000]

Location

Fixed Costs

Variable Costs (per unit)

Seattle

$280,000

$10/unit

Hong Kong

$460,000

$7/unit

Explanation / Answer

Cost = Fixed cost + Variable cost

a) Let at 'x' quantity, total cost is same

280000 + 10x = 460000 + 7x

3x = 180000

x = 60000

b) Total cost at x = 60000 is:

280000 + 10*60000 = 880000

c) At x = 120,000

Seattle = 280000 + 120000*10 = 1480000

Hong kong = 460000 + 120000*7 = 1300000

So, Hong Kong is better

d) Money saved is difference in total cost = 1480000 - 1300000 = 180000

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