A manufacturer is considering some expansion alternatives. One is to increase the capacity at their current location. A second set of alternatives is to build a new plant at one of two possible locations. The projected operating costs have been estimated as follows: $\begin{array}{lccc}&\text { Expand at Current }\
\text { Cost Category }&\text { Location }&\text { Location A }&\text { Location B }\
\text { Fixed } & \$ 125,000 & \$ 225,000 & \$ 175,000 \
\text { Direct labor per unit } & \$ 32.5 & \$ 30 & \$ 33 \
\text { Direct material per unit } & \$ 16 & \$ 17 & \$ 15.50 \
\text { Overhead cost per unit } & \$ 2.90 & 2.40 & \$ 2.50 \
\text { Transportation cost per } 100 \text { units } & \$ 125 & \$ 100 & \$ 110
\end{array}$ If the forecast of additional demand for the next year is 25,000 units, which alternative should be selected to minimize costs?
A) Expand at current location
B) Location A
C) Location B
D) None of the above

Question

Quizplus · Accepted Answer

The total cost for each alternative is:Expand at current location: $125,000 + (32.5 * 25,000) + (16 * 25,000) + (2.90 * 25,000) = $1,212,500Location A: $225,000 + (30 * 25,000) + (17 * 25,000) + (2.40 * 25,000) + (100 * 25,000/100) = $1,175,000Location B: $175,000 + (33 * 25,000) + (15.50 * 25,000) + (2.50 * 25,000) + (110 * 25,000/100) = $1,187,500Therefore, the best alternative is to expand at the current location.

A Manufacturer Is Considering Some Expansion Alternatives If the Forecast of Additional Demand for the Next Year