MEM575 INDUSTRIAL MANAGEMENT

Exercise Chapter 3: Plant Location

Q1. Four plant locations arc under consideration for a new microchip plant. Here are estimates
of the fixed and variable costs at each location.
Fixed cost Variable cost
Location per year per unit
A $3,500,000 $600
B 3,000,000 800
C 4,000,000 500
D 4,500,000 400
a. What is the total cost function for each location?
b. Plot the total cost functions for these locations on the same graph.
c. On the graph, identify the range of output for which each location has the least cost.
d. Which location should be selected for an output of 4,000 chips per year? 12,000 chips
per year?
a. Find break event point (BEP) and profit at (d) if the unit price is $1000 per unit

Q2. Two locations are under consideration for building a condominium. (A condominium is a
building in which each apartment is owned by the resident, rather than rented.) One
location is in suburb A of a large Eastern city, and the other is in suburb B. The marketing
manager has identified the following factors which bear upon the location decision and their
relative weights.
Factor Desirable Status Weight
1. Proximity to public transportation Should be close .20
2. Space for a parking lot Should be large .40
3. Property taxes Should be low .25
4. Electricity rates Should be low .15

Each factor will be rated on a scale of 1 = unsatisfactory to 10 = outstanding. Research has

revealed the following information about each location, and the marketing manager has
rated each factor at each location.
Location Rating
Factor A B A B

1. Public transportation 1 block 6 blocks 9 2

2. Parking lot 1 acre 3 acres 3 7
3. Property taxes $600/year $800/year 6 4
4. Electric rates $.09/kwh. $.06/kwh. 5 8
a. Determine the composite score for each location.
b. Where should the condominium be built? Why?

Q3. KuatRimau Sdn Bhd. that produces frozen murtabak has decided to expand its business by
producing new product which is frozen curry puffs. The current factory in Sepang,Selangor is
small and insufficient to handle the increased workload, hence the company is considering
 three options also in Selangor; A (new location), B (subcontract), and C (expand existing
facilities).

Alternative A would involve substantial fixed costs but relatively low variable costs: fixed
costs would be RM300,000 per year, and variable costs would be RM5 per pack.
Subcontracting would involve a cost per pack of RM25, and expansion would require an
annual fixed cost of RM50,000 and a variable cost of RM10 per pack.

i) Identify the range of output for each alternative that would yield the lowest total cost
ii) Determine the option and its lowest total cost for an expected annual volume of 35100
packs.
iii) Explain two factors might be considered in choosing between expansion and
subcontracting