Hiro Nakamura is CEO of the Cola King Bottling Company, a small regional producer operating in the Pacific Northwest. Nakamura is considering two alternative expansion proposals:
1. Construct a single bottling plant in Phoenix, Arizona with a capacity of 40,000 cases per month, at a monthly fixed cost of $20,000 and a variable cost of $2.50 per case.
2. Construct 3 plants, 1 each in Phoenix, Arizona; Las Vegas, Nevada; and Albuquerque, New Mexico, with capacities of 15,000, 14,000 and 13,000 respectively; and monthly fixed costs of $11,000, $10,000 and $9,000 each. Variable costs would be only $2.30 per case due to lower distribution costs, but sales from each plant would be limited to demand within the home state. The total estimated monthly sales volume in the southwestern states, 37,000 cases, is distributed as: Arizona, 15,000 cases; Nevada, 14,000 cases; and New Mexico, 8,000 cases.
A. Using a wholesale price of $4 per case in each state, find out the breakeven output quantities for each alternative.
B. Which alternative expansion scheme should Cola King follow?
C. If sales increase to production capacities, which alternative would prove to be more profitable?