Problem: A newly formed firm must decide on a plant location. There are two alternatives under consideration: locate near the major raw materials or locate near the major customers. Locating near the raw materials will result in lower fixed and variable costs than locating near the market, but the owners believe there would be a loss in sales volume because customers tend to favor local suppliers. Revenue per unit will be $187 in either case.
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Omaha
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Kansas City
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Annual fixed costs ($ millions)
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$ 1.1
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$ 1.3
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Variable cost per unit
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$ 32
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$ 47
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Expected annual demand (units)
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9,200
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11,475
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Using the above information, determine which location would produce the greater profit.