The fixed and variable costs for three potential manufacturing plant sites for a
ID: 347238 • Letter: T
Question
The fixed and variable costs for three potential manufacturing plant sites for a rattan chair weaver are shown: Site Fixed Cost Per Year Variable Cost per Unit $12.00 $6.00 $4.00 $1,100 $2,100 a) After rounding to the nearest whole number, site 1 is best below 67 units. After rounding to the nearest whole number, site 2 is best between and 500 units. After rounding to the nearest whole number, site 3 is best above 500 units b) it the demand is 510 units, then the best location for the potential manufacturing plant is SITE 3Explanation / Answer
Total cost = Fixed cost + Variable cost*Quantity (Q)
Site 1 total cost = 700 + 12Q
Site 2 total cost = 1100 + 6Q
Site 3 total cost = 2100 + 4Q
By equalling the total cost we will get the indifference point
Site 1 total cost = Site 2 total cost
700 + 12Q = 1100 + 6Q
Q = 66.67
Site 2 total cost = Site 3 total cost
1100 + 6Q = 2100 + 4Q
Q = 500
Site 3 total cost = Site 1 total cost
2100 + 4Q = 700 + 12Q
Q = 175
a)
After rounding to the nearest whole number, site 1 is best below 67 units
After rounding to the nearest whole number, site 2 is best between 67 and 500 units
After rounding to the nearest whole number, site 3 is best above 500 units
b) If the demand is 510 units, then the best location for the potential manufacturing plant is Site 3