Acme Corp. makes vending machines for small companies. They have recently starte
ID: 450806 • Letter: A
Question
Acme Corp. makes vending machines for small companies. They have recently started selling their vending machines in Southern California, with a great deal of success, at a price of $5,000 per machine. The company is convinced that they will need to either build a new plant near San Diego or expand their existing plant in New Orleans. If they build a new plant near San Diego, the annual fixed costs will be $6,000,000 and the variable costs will be $3,000 for each vending machine delivered to Southern California. If they expand the New Orleans plant, their annual fixed costs for the expansion will be $2,000,000 and the variable costs will be $4,000 for each vending machine delivered to Southern California. At what output will the two locations have the same total cost? Assume that the demand forecast is less than the output in part a. Which option should the company choose?Explanation / Answer
a. if they build new plant the total cost will be= fixed cost $6,000,000 and variable cost per unit $3000
where if they expand existing plant it requires fixed capital of $2,000,000 and variable cost per unit $4000
the equlize output is= 4000 units
at this the total cost of existing plant= 2,000,000+4000*4000= $18,000,000
total cost of new plant= 6,000,000+4000*3000= $18,000,000
b. if the demand forecasting is wrong and the actual demand is less than estimated one, it is better to go with expansion of existing plant. if the demand is for more than 4000 units, then it is better to go with new plant.
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