QUESTION - Location Selection
A lumber retailer is evaluating five possible locations to build a new store.
As the retailer carries different types of lumber, a selling unit is understood as a composite unit of lumber. In addition the selling price of one unit is an average price, which is dependent on the lumber composition.
The accounting department provides some estimates as in the table. These estimates are based on multiple location characteristics including transportation system, property cost, utilities cost, labor cost, population, income distribution, construction demand, competitors, etc.
For simplicity, assume that the chain's manager does not consider other costs or revenues.
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Data
|
Location 1
|
Location 2
|
Location 3
|
Location 4
|
Location 5
|
|
Fixed costs ($)
|
109,000
|
82,000
|
77,000
|
93,000
|
88,000
|
|
Merchandise cost/unit ($)
|
5.14
|
6.56
|
4.73
|
5.38
|
4.92
|
|
Direct labor cost/unit ($)
|
8.45
|
9.83
|
7.12
|
8.79
|
7.19
|
|
Overhead/unit ($)
|
1.75
|
1.64
|
1.72
|
1.69
|
1.59
|
|
Transportation cost/unit ($)
|
0.43
|
0.41
|
0.37
|
0.39
|
0.45
|
|
Sales volume (units)
|
580,000
|
501,000
|
530,000
|
460,000
|
490,000
|
|
Selling price/unit ($)
|
20.00
|
19.70
|
19.80
|
19.50
|
18.70
|
(a) Which location has the lowest total cost estimate?
(b) Which location has the highest sales revenue estimate?
(c) Which location should the retailer choose to build a new store?