A newly formed firm must decide on a plant location. There are two alternatives under consideration: locate near the major raw materials or locate near the major customers. Locating near the raw materials will result in lower fixed and variable costs than locating near the market, but the owners believe there would be a loss in sales volume because customers tend to favor local suppliers. Revenue per unit will be $184 in either case.

Question

Business

Donavan Pope

28 August, 09:28

A newly formed firm must decide on a plant location. There are two alternatives under consideration: locate near the major raw materials or locate near the major customers. Locating near the raw materials will result in lower fixed and variable costs than locating near the market, but the owners believe there would be a loss in sales volume because customers tend to favor local suppliers. Revenue per unit will be $184 in either case.

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Answers (1)

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Alan Dean · Answer 1

The firm should locate tne plant near the major customers.

Explanation:

Even if costs might be a bit higher, the potential earnings from being located near the customers should compensate. The firm could not only increase the sales revenue by trying to reach even more customers in the area, but also, it could raise the price of the product a bit, and see if the elasticity of the demand remains the same. In conclusion, the second location would probably give the firm more options.