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: What would be the total annual costs at the point of indifference?
A)$300,000
B)$240,000
C)$380,000
D)$220,000
E)$760,000

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:  What would be the total annual costs at the point of indifference?
A)$300,000 
B)$240,000 
C)$380,000 
D)$220,000 
E)$760,000

Quizplus · Accepted Answer

The point of indifference is the point at which the total cost of both locations is the same. To find this point, we need to set the total cost equations for both locations equal to each other, and then solve for the quantity. 
Let x = quantity produced 
Location 1: 
Total cost = $150,000 + $30x 
Location 2: 
Total cost = $100,000 + $40x 
150,000 + 30x = 100,000 + 40x 
10x = 50,000 
x = 5,000 
Now that we know the quantity, we can find the total annual cost at the point of indifference for each location: 
Location 1: 
Total cost = $150,000 + $30(5,000) = $300,000 
Location 2: 
Total cost = $100,000 + $40(5,000) = $300,000 
Therefore, the total annual costs at the point of indifference is $300,000. 
Since the total cost is the same for both locations at the point of indifference, either location would be the best choice.

A Manufacturing Firm Is Considering Two Locations for a Plant