Reference no: EM132232815
A newly formed firm must decide on a production facility location. There are three alternatives under consideration: (A) locate near the raw materials, (B) locate with the best access to transportation infrastructure, or (C) locate near the consumer market. Locating near the raw materials would lead to a lower fixed and variable cost than near the customer market. However, the owners believe that there would be a loss in sales volume since customers prefer local suppliers. At location A, they would only sell/produce 8,000 units as compared to location C where they expect to sell/produce 12,000 units. Locating near transportation infrastructure would result in the lowest fixed cost but the highest variable cost and a sales/production of 10,000 units.
Suppose that your product sells for $185 per unit (this is revenue). The costs per location are as follows:
Location A: has a fixed cost of $1,200,000 and a variable cost of $36 per unit
Location B: has a fixed cost of $1,000,000 and a variable cost of $62 per unit
Location C: has a fixed cost of $1,400,000 and a variable cost of $47 per unit
a. Based on the information regarding COST of each location, provide a recommendation of the cheapest alternative for all levels of production (e.g., 0-x units one location is cheapest while from x-y units another location is cheapest).
b. Based on the expected production/sales at each of the three locations, which will generate the highest PROFIT?
c. Describe two other factors that you might consider in your choice between location A, B and C.