Question

American Textile has the following issues to resolve to locate a new plant to manufacture towels for the growing US market:

• In Vietnam, 6 laborers, each making $2/day, can produce 48 towels per day
• In the Philippines, 3 laborers, each making $5/day, can produce 50 towels per day
• In the Dominican Republic, 10 laborers, each making $2/day, can produce 80 towels per day
• In Tupelo, Mississippi, 2 laborers, each making $58/day, can produce 290 towels per day

(Note: All money is in equivalent US Dollars and all laborers are working an 8-hour day)

1. Based on LABOR COSTS alone, which location would be the most economical to produce the towels and open a new plant? Show your work, summarize in a paragraph, and provide your decision.

The production in Vietnam, the Philippines, and the Dominican Republic is labor intensive while Tupelo has some newer equipment to make production easier. However, the education system in each country is different and repair costs for equipment vary by the education of the workforce and the ability to obtain spare parts. So, the FIXED COSTS for all equipment, rent (building – the only one owned by American Textile is in Tupelo, MS), and repair/maintenance for each location per year includes:

LOCATION	EQUIPMENT	RENT	REPAIR/MAINT.	TOTAL FIXED COSTS
Vietnam	$20,000	$5,000	$95,000
Philippines	$20,000	$7,500	$97,500
Dominican Republic	$12,000	$12,000	$126,000
Tupelo, Mississippi	$50,000	$0.00	$90,000

2. Calculate the TOTAL FIXED COSTS for each location then set up an equation for each showing TOTAL FIXED COSTS + VARIABLE COSTS (in this instance LABOR COSTS PER UNIT only) and TOTAL COSTS based on 200,000 towels per year. Draw a CROSSOVER CHART based on this number. What is the best location to choose?
3. Calculate the TOTAL COSTS and the best location to manufacture towels if the total volume increases to 500,000, and 1,000,000 (this can be placed in a graph – show me your calculations). What is this telling us about the cost to manufacture?
4. If each towel is selling for $5.00 a piece, what is the TOTAL REVENUE at each location for 200,000, 500,000 and 1,000,000 towels?
5. Is there a crossover point where it is better to move production based upon volume?
6. What does this tell me about global competition and what is needed for nations to compete? What is the driving factor based solely upon this model? What needs to change to make those who are not competitive more competitive? Do they have an advantage if the market is North America – and what is the advantage of one over another?

Answer 1

Computation of labor cost per unit:

Location (i)	Number of laborers (ii)	Cost per labor (iii)	Variable cost of production (iv)=(ii*iii)	Units produced (v)	Cost per unit (vi) =(iv/v)
Vietnam	6	2	12	48	0.25
Philippines	3	5	15	50	0.30
Dominican Republic	10	2	20	80	0.25
Tupelo, Mississippi	2	58	116	290	0.40

Best location based on labor cost alone is Vietnam or Dominican republic.

Computation of total fixed cost & total cost for 200,000units:

Location	Equipment	Rent	Repair/ Maintainance	Total fixed cost	Variable cost	Equation	Total cost (note 1)
Vietnam	20,000	5,000	95,000	120,000	0.25	120000+0.25x	170,000
Philippines	20,000	7,500	97,500	125,000	0.30	125000+0.3x	185,000
Dominican Republic	12,000	12,000	126,000	150,000	0.25	150000+0.25x	200,000
Tupelo, Mississippi	50,000	0	90,000	140,000	0.40	140000+0.4x	220,000

Note 1 = Total cost = (200,000units*Variable cost)+Total Fixed cost
Vietnam is the best location to chose because this location has the least total cost.


Computation of total cost for 500,000 & 1,000,000 units:

Location	Total fixed cost	Variable cost	Total cost for 500,000units	Total cost for 1,000,000units
Vietnam	120,000	0.25	245,000	370,000
Philippines	125,000	0.30	275,000	425,000
Dominican Republic	150,000	0.25	275,000	400,000
Tupelo, Mississippi	140,000	0.40	340,000	540,000

Vietnam is the best location to chose because this location has the least total cost.

Computation of total revenue:

Location	Revenue for 200,000units	Revenue for 500,000units	Revenue for 1,000,000units
Vietnam	1,000,000	2,500,000	5,000,000
Philippines	1,000,000	2,500,000	5,000,000
Dominican Republic	1,000,000	2,500,000	5,000,000
Tupelo, Mississippi	1,000,000	2,500,000	5,000,000