Question

In: Accounting

3. The fixed and variable costs for 3 potential plant sites for a ski equipment manufacturer...

3. The fixed and variable costs for 3 potential plant sites for a ski equipment manufacturer are shown below.

Site Fixed Cost Per Year Variable Cost Per Unit

Atlanta $250 $7

Burlington $500 $6

Cleveland $1000 $5

(a) Graph the total cost lines for the three potential sites. (use x=0 and x=300 to draw the graph) (Note that you must show 2 intersection points on the graph). (3 points)

(b) Over what range of annual volume is each location the preferable one? (You must derive how to find the intersection points mathematically). (3 points)

(c) If expected volume is 400 units, which location would you recommend? (2 points)

Expert Solution

SOLUTION:

(a) Graph the total cost lines for the three potential sites.

(b) Over what range of annual volume is each location the preferable one?

Let x be the point where total cost at atlanta and Burlington will be same

Therefore,

7x+250 = 6x+500

7x-6x = 500-250

X = 250 units.

Therefore from 0 to 250 units is the annual range of production at Atlanta

Let y be the units where total cost at Burlington and Cleveland will be same

Therefore,

6y+500= 5y+1000

6y-5y = 1000 - 500

y = 500 units

Thus, 251 to 500 units is the annual range of production at Burlington plant

And 501 or more is The annual range of production at Cleveland plant

Therefore, following is the range of production at respective plants :-

Plant site	range of production
Atlanta	0 to 250 units
Burlington	251 to 500 units
Cleveland	501 or more units

(c) If expected volume is 400 units, which location would you recommend?

If expected volume is 400 units then it falls under the range of 251 to 500 belonging to Burlington plant.

Thus, if expected volume is 400 units then it should be produced at Burlington plant

ekkarill92 answered 1 year ago

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