A Firm Is Considering Two Location Alternatives

question 178

Multiple Choice

A firm is considering two location alternatives. At location A, fixed costs would be $4,000,000 per year, and variable costs $0.30 per unit. At alternative B, fixed costs would be $3,600,000 per year, with variable costs of $0.34 per unit. If annual demand is expected to be 9 million units, which plant offers the lowest total cost?

• A) Plant A, because it is cheaper than Plant B for all volumes below 10,000,000 units.
• B) Plant B, because it is cheaper than Plant A for all volumes below 10,000,000 units.
• C) Plant A, because it is cheaper than Plant B for all volumes.
• D) Plant B, because it has the lower variable cost per unit.
• E) Neither Plant A nor Plant B, because the crossover point is at 9 million units.

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Definitions:

Customers Served

Refers to the number of individual customers or client accounts a business has successfully provided its products or services to within a specific period.

Activity Level

A measurement of the volume of activity or production within a company, often influencing costs and operational efficiency.

Activity Variances

The differences between the expected costs of activities and the actual costs, used in managerial accounting to analyze performance.

Meals Served

The total number of meals prepared and provided to customers over a given period, often used in the hospitality or restaurant industry as a performance metric.