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 $185 in either case. Annual fixed costs ($ millions) Variable cost per unit Expected annual demand (units) Omaha $ 1.2 $ 35 10, 150 Kansas City $ 1.0 $ 50 10,750 Using the above information, determine which location would produce the greater profit. (Omit the "$" sign in your response.) (Click to select) v would produce the greater gross profit of $ (Click to select) Omaha Kansas City

Answer 1

OMAHA

FIXED COST = 1200000

VARIABLE COST = 35

PRICE PER UNIT = 185

EXPECTED VOLUME = 10150

PROFIT = UNITS * CONTRIBUTION MARGIN - FIXED COST

PROFIT = (10150 * (185 - 35)) - 1200000 = 322500

KANSAS

FIXED COST = 1000000

VARIABLE COST = 50

PRICE PER UNIT = 185

EXPECTED VOLUME = 10750

PROFIT = UNITS * CONTRIBUTION MARGIN - FIXED COST

PROFIT = (10750 * (185 - 50)) - 1000000 = 451250

KANSAS IS BETTER WITH A GROSS PROFIT OF 451250

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