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 $171 in either case. Kansas City $ 1.1 Omaha $ 1.0 21 9,450 Annual fixed costs ($ millions) Variable cost per unit Expected annual demand (units) 36 10,050 Using the above information, determine which location would produce the greater profit. (Omit the "$" sign in your response.) would produce the greater gross profit of $ (Click to select) Next> 3 of 4 Prev

Answer 1

Omaha

would produce the greater gross profit of $

417,500.00

Calculations and explanations:

Profit = [(revenue per unit – Variable cost per unit)*Quantity] - Fixed costs

Profit for Omaha = [(171 – 21)*9450] - $1 million

= $417,500

Profit for Kansas City = [(171 – 36)*10,050] - $1.1 million

= $256,750