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                  $500,000        $210

Mexico            $150,000        $250

Canada              $300,000        $230

Panama             $ 50,000         $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 11,000 at increment of 200.

c- If the company forecasts that market demand will be around 9000 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.

Answer 1

a) Cross-over analysis

b) Total production cost linear graph is following:

c)

In the above cross-over analysis, we see that Canada is the best Location alternative for production range of 7500 to 10000.

Market demand of 9000 is within this range. Therefore, Canada is the best choice.

Total yearly profit = Demand * ( Selling price - Variable cost) - Fixed cost

= 9000*(995-230)-300000

= $ 6,585,000

d)

Total cost, Total revenue and Total profit graph for the optimal location (Canada) are plotted as below:

Production Volume	Total cost	Total revenue	Total profit
0	300,000	0,0	-300,000
2,000	760,000	1,990,000	1,230,000
7,500	2,025,000	7,462,500	5,437,500
9,000	2,370,000	8,955,000	6,585,000
15,000	3,750,000	14,925,000	11,175,000