A Manufacturing Facility Is Considering Two Location Alternatives, X and Y

question 14

Multiple Choice

A manufacturing facility is considering two location alternatives, X and Y. At location X, fixed costs would be $5,000,000 per year and variable costs would be $0.30 per unit. At location Y, fixed costs would be $4,600,000 per year and variable costs would be $0.40 per unit. If annual demand is expected to be 10 million units, which location should be chosen?

• A) Plant X, because it is cheaper than Plant Y for all volumes.
• B) Plant Y, because it is cheaper than Plant X for all volumes over 4,000,000 units.
• C) Plant X, because it is cheaper than Plant Y for all volumes over 4,000,000 units.
• D) Plant Y, because it has the lower variable cost per unit.

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Definitions:

Contract Manufacturing

The hiring of a foreign company to produce a specified volume of the initiating company’s product to specification; the final product carries the domestic firm’s name.

Licensing

Licensing is the process whereby a company allows another entity to use its intellectual property, brand, or product for a specified period in exchange for fees or royalties.