In: Operations Management
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 |
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