The fixed and variable costs for three potential manufacturing plant sites for a

Question

The fixed and variable costs for three potential manufacturing plant sites for a rattan chair weaver are shown below. They antic ipate that they will make 25,000 units per Site Fixed Cost Per Year Variable Cost Per Unit 500 S 1,000 1,700 # units 25,000 Selling Price $29 a) What is the lowest cost location for the specified volume? b) What is the gross profit (income- variable costs) to be anticipated at that location, at that volume? Use this area to Solve the Problem in Excel (using formulas): Site Fixed Cost Per Year Variable Cost Per Unit Total Annual Cost at Specified Units 500 1,000 1,700 units 25,000 Selling Price $29 )What is the lowest cost location for the specified volume b) what is the gross profit (income , variable costs) to be anticipated at that location? They want to know the range of production that each site is optimal Use this area to Solve the Problem in Excel (using formulas) Fixed Cost Per Year Variable Cost Per Unit Total Annual Cost at Specified Units 500 1,000 1,700 between Athers & Brusses between Brussels & Lisbon units *Begin with a "dummy-figure here a) Over what range of production is site #1 optimal? b)Over what range of production is site #2 optim al? Over what range of production is site 3 optimal between

Explanation / Answer

Part A

a) Lowest cost location will be

where the cost is lowest,

Site 1:- Fixed cost + Variable cost (Cost per unit * No. of Units) = 500 + 25000 * 11 = 275500

Site 2:- Fixed Cost + Variable Cost = 1000 + 25000 * 7 = 176000

Site 3:- Fixed Cost + Variable Cost = 1700 + 25000 * 4 = 101700

Site 3 is the location with the lowest cost.

b) Gross Profit (anticipated) at a volume of 25000 units

The formula goes like this,

Gross Profit = Income - Variable Cost

Site 1:- Gross Profit = Sales (Selling price per unit * No. of Units Sold) - Variable Cost (No. of units sold * Variable cost per unit) = (29 * 25000) - (25000 * 11) = 450000

Site 2:- (29 * 25000) - (25000 * 7) = 550000

Site 3:- (29 * 25000) - (25000 * 4) = 624000

Part B

For calculating optimal points for each site, we need to find the level of inventory where the cost is covered,

Here assuming the sale price per unit is $29

For site 1, the optimal point will be up to the 9500 units ($275500/$29)

For site 2, the optimal point will be between 6000 units to 7000 units

For site 3:- the optimal point will be above 3500 units.  

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