A manufacturing firm is considering two locations for a plant to produce a new product. The two locations have fixed and variable costs as follows: $$\begin{array} { l r l }
\text { Location } & \mathrm { FC } \text { (annual) } & \mathrm { VC } \text { (per unit) } \
\hline \text { Atlanta } & \$ 80,000 & \$ 20 \
\text { Phoenix } & \$ 140,000 & \$ 16
\end{array}$$ If annual demand is estimated to be 20,000 units, which location should the company select?
A) Atlanta
B) Phoenix
C) either Atlanta or Phoenix
D) reject both Atlanta and Phoenix
E) build at both locations

Question

A manufacturing firm is considering two locations for a plant to produce a new product. The two locations have fixed and variable costs as follows: $$\begin{array} { l r l } 
\text { Location } & \mathrm { FC } \text { (annual) } & \mathrm { VC } \text { (per unit) } \
\hline \text { Atlanta } & \$ 80,000 & \$ 20 \
\text { Phoenix } & \$ 140,000 & \$ 16
\end{array}$$ If annual demand is estimated to be 20,000 units, which location should the company select?
A) Atlanta
B) Phoenix
C) either Atlanta or Phoenix
D) reject both Atlanta and Phoenix
E) build at both locations

Quizplus · Accepted Answer

To determine the best location, we need to calculate the total cost of producing 20,000 units at each location.

For Atlanta: 
Total Cost = Fixed Cost + Variable Cost per unit x Number of units 
Total Cost = $80,000 + $20 x 20,000 
Total Cost = $480,000

For Phoenix: 
Total Cost = Fixed Cost + Variable Cost per unit x Number of units 
Total Cost = $140,000 + $16 x 20,000 
Total Cost = $460,000

Therefore, the total cost is lower in Phoenix, making it the better choice for the company.

A Manufacturing Firm Is Considering Two Locations for a Plant