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A newly formed firm must decide on a plant location. There are two alternatives under consideration:...

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Operations Management

A newly formed firm must decide on a plant location. There aretwo alternatives under consideration: locate near the major rawmaterials or locate near the major customers. Locating near the rawmaterials will result in lower fixed and variable costs thanlocating near the market, but the owners believe there would be aloss in sales volume because customers tend to favor localsuppliers. Revenue per unit will be $177 in either case.

Omaha Kansas City

Annual fixed costs ($ millions) $ 1.2 $ 1.3

Variable cost per unit $ 27 $ 42

Expected annual demand (units) 9,750 10,350

Using the above information, determine which location wouldproduce the greater profit. (Omit the \"$\" sign in yourresponse.)

Which would produce the greater gross profit of $______________.

Answer & Explanation Solved by verified expert
4.2 Ratings (586 Votes)

Answer: Omaha will produce a greater gross profit of $ 262,500.

Explanation:

Omaha Kansas
annual fixed cost           1,200,000       1,300,000
variable cost per unit                        27                    42
expected annual demand                   9,750            10,350
revenue per unit                      177                  177
profit per unit= revenue-variable cost                      150                  135
Total annual profit= expected demand*profit per unit           1,462,500       1,397,250
expected monetary value= total annual profit-annual fixed cost              262,500            97,250

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