Let the number of units = N Therefore, total associated cost for each location f
ID: 373411 • Letter: L
Question
Let the number of units = N
Therefore, total associated cost for each location for N number of units
= Fixed cost + Total variable cost + Incremental transportation cost
Thus , when N = 800,
Total cost associated with Lexington
= 4000 + 4 x 800 + 19000
= 4000 + 3200 + 19000
= $26200
Total cost associated with Chicago
= 3000 + 5 x 800 + 22000
= 3000 + 4000 + 22000
= $29000
Total cost associated with Madison
= 4500 + 6 x 800 + 18000
=4500 + 4800 + 18000
= $27300
Basis above data, least cost location out of above three is Lexington.
WILL CHOOSE LEXINGTON IF DEMAND IS GOING TO BE 800 UNITS
WILL CHOOSE LEXINGTON IF DEMAND IS GOING TO BE 800 UNITS
Explanation / Answer
C&A is considering three potential locations for its wareouses. Lexington, Chicago and Madison. Lexington involved a fixed cost of $4,000 per month and a variable cost of $4 per unit; Chicago involves a fixed cost of $3,000 per month and a variable cost of $5 per unit; Madison involves a fixed cost of $4,500 per month and a variable cost of $6 per unit. Use of the Lexington location increases transportation costs by $19,000 per month. Chicago by $22,000 a month and Madison by $18,000 per month. Which location will you choose if demand is expected to be 800 units per month?
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