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 $177 in either case.

Omaha Kansas City

Annual fixed costs ($ millions) $ 1.2 $ 1.3

Variable cost per unit $ 27 $ 42

Expected annual demand (units) 9,750 10,350

Using the above information, determine which location would produce the greater profit. (Omit the "$" sign in your response.)

Which would produce the greater gross profit of $ ______________.

Answer 1

Answer: Omaha will produce a greater gross profit of $ 262,500.

Explanation:

	Omaha	Kansas
annual fixed cost	1,200,000	1,300,000
variable cost per unit	27	42
expected annual demand	9,750	10,350
revenue per unit	177	177
profit per unit= revenue-variable cost	150	135
Total annual profit= expected demand*profit per unit	1,462,500	1,397,250
expected monetary value= total annual profit-annual fixed cost	262,500	97,250

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