Point of Indifference A distribution company is considering two locations for th
ID: 3020560 • Letter: P
Question
Point of Indifference
A distribution company is considering two locations for the construction of a new automated warehouse: Chicago and Dallas. Two types of automation are also being considered: bar coding and RF/ID (radio-frequency identification). The annual operating costs for each type of automation at the two locations are:
Bar Coding
RF/ID
Location
Fixed Cost
Variable Cost per 1,000 units
Fixed Cost
Variable Cost per 1,000 units
Chicago
$1,800,000
$12.30
$2,700,00
$9.70
Dallas
1,500,000
13.10
2,300,000
9.40
For what range of annual product volume handled would each location and type of automation be preferred?
Bar Coding
RF/ID
Location
Fixed Cost
Variable Cost per 1,000 units
Fixed Cost
Variable Cost per 1,000 units
Chicago
$1,800,000
$12.30
$2,700,00
$9.70
Dallas
1,500,000
13.10
2,300,000
9.40
Explanation / Answer
THE BAR CODING AT CHICAGO AND RF/ID AT CHICAGO HAS A DIFFERENCE OF90,000 IN FIXED COST
BUT AROUND 2.6 $ LESS AT EVERY UNIT.
SO IF WE PRODUCE MORE THEN 90,000 UNIT THEN RF/ID IS MORE PROFITABLE
SIMILARLY BAR CODDING AT DALLAS AND RF/ID AT DALLAS HAS A DIFFERENCE OF 80,000 IN FIXED COST
BUT THE VARIABLE COST DIFFERENCE IS 3.70$ PER UNIT
SO IF ER PRODUCE MORE THEN 30,000 UNIT THE DIFFERENCE WILL SURPASS