Question
In: Operations Management
Arab Security Storage Company; lease document storagefacilities to non- government agencies on a multiyear contract...
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.
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