A manufacturing facility is considering two location alternatives, X and Y. At location X, fixed costs would be $5,000,000 per year and variable costs would be $0.30 per unit. At location Y, fixed costs would be $4,600,000 per year and variable costs would be $0.40 per unit. If annual demand is expected to be 10 million units, which location should be chosen?
A) Plant X, because it is cheaper than Plant Y for all volumes.
B) Plant Y, because it is cheaper than Plant X for all volumes over 4,000,000 units.
C) Plant X, because it is cheaper than Plant Y for all volumes over 4,000,000 units.
D) Plant Y, because it has the lower variable cost per unit.

Question

Quizplus · Accepted Answer

To determine the best choice, we need to calculate the total cost for both locations at the expected demand of 10 million units.
For location X, total cost = Fixed cost + (Variable cost per unit * units)
Total cost for location X = $5,000,000 + ($0.30 * 10,000,000) = $8,000,000
For location Y, total cost = Fixed cost + (Variable cost per unit * units)
Total cost for location Y = $4,600,000 + ($0.40 * 10,000,000) = $8,600,000
Therefore, location X has the lower total cost and should be chosen. Choice C is the correct answer.

A Manufacturing Facility Is Considering Two Location Alternatives, X and Y