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 $189 in either case.

Using the above information, determine which location would produce the greater profit. (Omit the "$" sign in your response.)

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 $189 in either case.

Explanation / Answer

Hi,

Please find the answer as follows;

Omaha:

Sales = 9350*189 = 1767150

Less Variable Cost = 9350*32 = 299200

Contribution = 1467950

Fixed Cost = 1000000

Gross Profit = 467950

Kansas:

Sales = 11450*189 = 2164050

Less Variable Cost = 11450*46 = 526700

Contribution = 1637350

Less Fixed Cost = 1000000

Gross Profit = 637350

Kansas City would produce the greater profit of 637350.

Thanks.

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