Problem 8-1 A newly formed firm must decide on a plant location. There are two a
ID: 422503 • Letter: P
Question
Problem 8-1 A newly formed firm must decide on a plant location. There are two alternatives under consideration: locate near the major raw materials or locate near the major customers. Locating near the raw materials will result in lower fixed and variable costs than locating near the market, but the owners believe there would be a loss in sales volume because customers tend to favor local suppliers. Revenue per unit will be $189 in either case Omaha Kansas City Annual fixed costs ($ millions) Variable cost per unit Expected annual demand (units) $1.1 $ 30 9,400 S 46 11,075 Using the above information, determine which location would produce the greater profit. (Omit the "S" sign in your response.) (Click to select) would produce the greater gross profit of $ References eBook & Resource Worksheet Difficulty: 1 Easy Problem 8-1 Learning Objective: 08-07 Use the techniques presented to evaluate location alternatives Check my workExplanation / Answer
Location Omaha
Profit = Sales*Revenues – Fixed costs – Sales*Variable cost
= (9400*189 – 1100000 – 9400*30)
=394600
Location Kansas:
Profit = Sales*Revenues – Fixed costs – Sales*Variable cost
= (11075*189 – 1400000 – 11075*46)
183725
Location Omaha produces higher gross profit of 394600 $