A newly formed firm must decide on a plant location. There are two alternatives

Question

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 $174 in either case. Omaha Kansas City 0.91.0 Annual fixed costs (s millions) variable cost per unit Expected annual demand (units) $2439 10,200 9,600 Using the above information, determine which location would produce the greater profit. (Omit the "$" sign in your response.) (Click to select) would produce the greater gross profit of $

Explanation / Answer

For Omaha

Profit for Omaha = Q(R-VC) - FC = 9600(174-24)-900000 = (9600x150) - 900000 = 1440000-900000 = $540000

For Kansas city

Profit for Kansas city = Q(R-VC) - FC = 10200(174-39)-1000000 = (10200x135) - 1000000 = 1377000-1000000 = $377000

So Omaha would produce the vreater gross profit of $540000

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