A major computer manufacturer is interested in establishing a customer service center to handle business for the next decade
They conduct exhaustive research on land and construction costs, utilities, tax breaks, and wages at three sites, Oklahoma City, Austin, and Nashville. Answer these questions using these costs as displayed in the table below.
Costs Austin Nashville Oklahoma City
Fixed ($) 200,000 150,000 300,000
Variable ($/unit) 7 10 4
Graph the total cost curves and indicate the range of output that is best for each prospective site. What are the assumptions you have made in this analysis?
What will be an ideal response?
Answer: The total cost equations are as follows:
TCAustin = 200,000 + 7x
TCNashville = 150,000 + 10x
TCOklahoma City = 300,000 + 4x
Intersection points of interest are at Nashville and Austin and at Austin and Oklahoma City.
Nashville & Austin Austin & Oklahoma City
150,000 + 10x = 200,000 + 7x 200,000 + 7x = 300,000 + 4x
3x = 50,000 3x = 100,000
x = 16,666. x = 33,333.
The best location for each range of output is
0 units through 16,666 units = Nashville
16,667 units through 33,333 units = Austin
More than 33,334 units = Oklahoma City
This analysis assumes that costs are linear through the entire range of 0 to over 33,333 units.
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