Question

In: Operations Management

A forest product company likes to develop a wood pellet manufacturing plant in Maryland and has...

A forest product company likes to develop a wood pellet manufacturing plant in Maryland and has the following cost information on five likely destinations (table below). The expected sale price of wood pellets per bag is $5. a. Please find out which location is preferable in terms of BEPx and/or BEP$? b. What should be the minimum out level the company should target to earn some profit? c. Using the locational break-even analysis (cross-over quantity with minimum cost), can you identify any other location that may be more profitable? d. What should be the minimum quantity of output at the new location for maximizing profit?

Price per bag $5.00
Location Fixed Costs Variable Costs per bag Total cost Revenue Profit BEP(units) BEP ($)
Towson 350,000 $1.30
College Park 250,000 $1.10
Baltimore 370,000 $1.10
Columbia 280,000 $0.80
Pikesville 360,000 $1.80

Solutions

Expert Solution

We will use the Break even analysis for all the location to find the right location for the least cost of production.

Location : Towson

For Breakeven, cost of production= revenue

Total fixed cost + Total variable cost = Price per wood pellet * Qty sold

Let the qty sold be x

350000 + x*1.30 = 5*x

350000 =3.7*x

X= 94595 units

Cost of production = Revenue from sale = $ 472,973

Similarly for the other location

Location: College Park

250000 + x*1.10 = 5*x

X= 64103 units

Cost of production = Revenue from sale = $ 320513

Location : Baltimore

370000 + x*1.10 = 5*x

X= 94872 units

Cost of production = Revenue from sale = $ 474359

Location : Columbia

280000+ x*0.80 = 5*x

X= 66667 units

Cost of production = Revenue from sale = $ 333,334

Location : Pikesville

360000+ x*1.80 = 5*x

X= 112500 units

Cost of production = Revenue from sale = $ 562500

  1. The least number of units to be manufactured to BEP (units) and BEP ($) occurs at location College Park .
  2. The minimum level at location College park the company should target is 64103 units

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