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 $0.34 per unit. If annual demand is expected to be 9 million units, which plant offers the lowest total cost?
A) Plant A, because it is cheaper than Plant B for all volumes below 10,000,000 units.
B) Plant B, because it is cheaper than Plant A for all volumes below 10,000,000 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 9 million units.

Question

Quizplus · Accepted Answer

To determine the lowest total cost, we need to calculate the total cost for each option at 9 million units.

For option A, the total cost would be:

Total Cost = Fixed Cost + Variable Cost
Total Cost = $4,000,000 + ($0.30 x 9,000,000)
Total Cost = $6,700,000

For option B, the total cost would be:

Total Cost = Fixed Cost + Variable Cost
Total Cost = $3,600,000 + ($0.34 x 9,000,000)
Total Cost = $6,660,000

Therefore, option B offers the lowest total cost at 9 million units, making it the best choice.

A Firm Is Considering Two Location Alternatives