question archive University of Southern MississippiMKT 370 Eagle Hunt company is planning to open a new plant
University of Southern MississippiMKT 370 Eagle Hunt company is planning to open a new plant
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University of Southern MississippiMKT 370
Eagle Hunt company is planning to open a new plant. They have collected information on fixed and variable costs for three potential plant locations.
Location
Annual Fixed Cost Unit Variable Cost
Detroit $500,000 $300
New Orleans $750,000 $200
San Bernardino $900,000 $100
Find the break-even points and determine the range of demand for which each location has a cost advantage. Please show the detailed procedures to get credit.
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Answer:
Break points refers to the location where the cost and returns of the company equal i.e., no loss or profit.
Break -even points of Detroit and New Orleans can be calculated as follows.
Let the quantity to be produced be x
Therefore , the units for the factory located in Detroit and New Orleans can be calculated as follows,
500,000+3000*x=750 ,000+200*x
100x=250,000
x=25,000.
This implies that , to have cost advantage, the factory located in Detroit requires to produce units which are less than 25,000 while the factory located at New Orleans should produce more than 25,000 units for it to gain cost advantage.
Determination of range of demand for location of New Orleans and St. Bernardino will be as follows,
Fixed cost variable cost
Orleans $750,000 $200
St Bernardino $900,0000 $100
Therefore, cost advantage for the two will be as follows
750,000=200*x=900,000+100*x
100x=150,000
x=15,000
Therefore the factory which is located in New Orleans has to produce less than 15,000 units for it to get cost advantage while the factory located in St. Bernardino should produce more than 15,000 units for gaining cost advantage.
The factory located in Detroit should produce less than 25,000 units to get cost advantage.
The factory located in New Orleans should produce more than 25,000 units for gaining cost advantage.
The factory which is located in New Orleans has to produce less than 15,000 units for it to get cost advantage while the factory located in St. Bernardino should produce more than 15,000 units for gaining cost advantage.
