A firm that has recently experienced an enormous growth rate is seeking to lease
ID: 458313 • 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 $37,000 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 $27,000 per year. Expected annual volume is 11,600 units.
Explanation / Answer
For economic analysis of the location, compare total cost incurred at each location for given sales volume. Total cost (TC) is given by formula:
Total cost = Fixed cost + Variable cost per unit x volume + Transportation cost
TC = FC + VC/unit x Q + T
Q = 11600 units
Locations
Memphis, TN
Biloxi, MS
Birmingham, AL
Fixed Cost (FC)
$37,000
$ 60,000
$100,000
VC/unit
$8
$4
$5
Transportation cost (T)
$50,000
$60,000
$27,000
Sales Volume (Q)
11600
11600
11600
Total Cost (TC)
$179,800
$166,400
$185,000
As the total cost of the Location Biloxi, MS is lowest of all, it is best to locate the plant at this location to reduce the total cost.
Working note:
For location Memphis: TC = 37000 + 8*11600 + 50000 = 179800
For location Biloxi: TC = 60000 + 4*11600 + 60000 = 166400
For location Birmingham: TC = 100000 + 8*11600 + 27000= 185000
Locations
Memphis, TN
Biloxi, MS
Birmingham, AL
Fixed Cost (FC)
$37,000
$ 60,000
$100,000
VC/unit
$8
$4
$5
Transportation cost (T)
$50,000
$60,000
$27,000
Sales Volume (Q)
11600
11600
11600
Total Cost (TC)
$179,800
$166,400
$185,000
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