A firm that has recently experienced an enormous growth rate is seeking to lease

Question

A firm that has recently experienced an enormous growth rate is seeking to lease a small plant in Memphis, TN; Biloxi, MS; or Birmingham, AL. Prepare an economic analysis of the three locations given the following information: Annual costs for building, equipment, and administration would be $59,000 for Memphis, $69,000 for Biloxi, and $104,000 for Birmingham. Labor and materials are expected to be $7 per unit in Memphis, $5 per unit in Biloxi, and $5 per unit in Birmingham. The Memphis location would increase system transportation costs by $58,000 per year, the Biloxi location by $68,500 per year, and the Birmingham location by $25,400 per year. Expected annual volume is 14,400 units. (Omit the "$" sign in your response.)

Explanation / Answer

Let's assume the system transportation cost is 0 for each location at begining of year

The cost of Memphis at end of a year = 59000( fixed cost) + 5( cost per labour &material) *14400( expected volume) + 58000 ( increased cost of transportation) = 59000+ 72000+58000= 189000

The total cost of Biloxi location = 69000( fixed cost) + 5( cost per labour material) *14400+ 68000= 69000+72000+68000=209000

The total cost of Brigham by end of year= 104000( fixed cost) + 5( cost per labour and materials) * 14400 ( expected volume) + 25400=104000+72000+25400=201400

As per above information, cost of Biloxi locations will be lesser than that of other 2 locations. So it should be taken on lease

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