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In: Operations Management

Arab Security Storage Company; lease document storagefacilities to non- government agencies on a multiyear contract...

  1. Arab Security Storage Company; lease document storage facilities to non- government agencies on a multiyear contract basis. The company is considering three potential locations (A, B, and C) for a new facility that will have (contractual guaranteed) annual costs of $55,000, $50,800 and 58,800, respectively. The annual revenue from the leasing the facility to a government agency is know in advance to be 80,000 for location A, $72,000 for location B, and $84,000 for C location.

Which location will maximize the net return per year?

Solutions

Expert Solution

Location A:

Revenue = $80,000

Cost = $55,000

Net Return = Revenue – Cost = 80000 – 55000 = $25000

Location B:

Revenue = $72,000

Cost = $50,800

Net Return = Revenue – Cost = 72000 – 50800 = $21200

Location C:

Revenue = $84,000

Cost = $58,800

Net Return = Revenue – Cost = 84000 – 58800 = $25200

Answer is: Location C will maximize the net return per year.

keosha answered 2 years ago
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