A firm is considering two location alternatives.At location A,fixed costs would be $4,000,000 per year,and variable costs $0.30 per unit.At alternative B,fixed costs would be $3,600,000 per year,with variable costs of $0.35 per unit.If annual demand is expected to be 10 million units,which plant offers the lowest total cost?
A)Plant A,because it is cheaper than Plant B for all volumes over 8,000,000 units.
B)Plant B,because it is cheaper than Plant A for all volumes over 8,000,000 units.
C)Plant A,because it is cheaper than Plant B for all volumes.
D)Plant B,because it has the lower variable cost per unit.
E)Neither Plant A nor Plant B,because the crossover point is at 10 million units.

Question

Quizplus · Accepted Answer

The total cost for Plant A is $4,000,000 + ($0.30 * 10,000,000) = $7,000,000. The total cost for Plant B is $3,600,000 + ($0.35 * 10,000,000) = $7,100,000. Plant A is cheaper for 10 million units.

A Firm Is Considering Two Location Alternatives