QUESTION 6 2 points Save Answer A firm is considering two location alternatives.

Question

QUESTION 6 2 points Save Answer A firm is considering two location alternatives. At location A, fixed costs would be $4,000,000 per year, and variable costs S0.30 per unit. At alternative B, fixed costs would be $3,600,000 per year, with variable costs of $0.35 per unit. If annual demand is expected to be 10 million units, which plant offers the lowest total cost? "Hint use the crossover chart method. Plant A, because it is cheaper than Plant B for all volumes over 8,000,000 units Plant B, because it is cheaper than Plant A for all volumes over 8,000,000 units. Plant A, because it is cheaper than Plant B for all volumes Neither Plant A nor Plant B, because the crossover point is at 10 million units.

Explanation / Answer

Location A:

Fixed cost = 4,000,000

Variable cost = $0.3

Total cost = Fixed cost + Quantity*Variable cost

Total cost = 4,000,000 + 0.3Q

Location B:

Fixed cost = 3,600,000

Variable cost = $0.35

Total cost = Fixed cost + Quantity*Variable cost

Total cost = 3,600,000 + 0.35Q

By equalling the total cost we get crossover point

4,000,000 + 0.3Q= 3,600,000 + 0.35Q

Q = 8000000

Plant A, because it is cheaper than plant B for all volumes over 8,000,000 units

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