Question

A manufacturing firm is planning to open a new factory. There are four countries under consideration: USA, Canada, Mexico, and Panama. The table below lists the fixed costs and variable costs for each site. The product is mainly sold in the U.S. for $995 per unit.

Location                  Fixed Cost      Variable cost

USA                          $1,000,000             $210

Mexico                     $550,000                $250

Canada                      $700,000                $230

Panama                      $ 450,000               $300

a- Using cross-over analysis, find the range of production that makes each country optimal with lowest total cost.

b- Using Excel, construct total production cost linear graph for all 4 locations and verify cross-over points obtained in part (a). In your graph, use quantity values from 0 to 20,000 at increments of 500.

c- If the company forecasts that market demand will be around 17,000 per year, which country is the best choice and what is the yearly profit?

d- Construct Total cost, Total revenue, and Total profit graphs for the optimal location in part C. In your graph, use quantity values from 0 to 20,000 at increments of 500.

Answer 1

Answer- (a)

Total Cost = Fixed cost+ Variable Cost

For optimal production with lowest total cost would satisfies following

Fixed cost+ X(Variable cost) =X( Selling Price)

Location	Fixed Cost ($)	Variable Cost($)/unit	Selling price ($)/unit	Value of X	Optimal production	Optimal production (No. of units) at lowest Cost
USA	1000000	210	995	785	1273.89	1274
Mexico	550000	250	995	745	738.26	738
Canada	700000	230	995	765	915.03	915
Panama	450000	300	995	695	647.48	647

B Answer

C) Answer

If Market Demand is 17000 per Year then

Location	Fixed Cost ($)	Variable Cost($)/unit	Demand/ Year	Production Cost (Fix+(Variable*demand))	Selling price ($)/unit	Revenue (Selling Price*Demand)	Profit (Revenue-Production Cost)
USA	1000000	210	17000	4570000	995	16915000	12345000
Mexico	550000	250	17000	4800000	995	16915000	12115000
Canada	700000	230	17000	4610000	995	16915000	12305000
Panama	450000	300	17000	5550000	995	16915000	11365000

USA will be the best country and yearly profit would be $12345000

D) Answer