A firm, with a production target of 50,000 units/year has the following data for the selection of a new location for its plant
Q. A firm, with a production target of 50,000 units/year, has the following data for the selection of a new location for its plant
| Location | Fixed cost (Rs.) | Variable costs per unit (Rs.) |
| P | 110,000 | 2 |
| Q | 95,000 | 2.5 |
| R | 80,000 | 3 |
| S | 75,000 | 3.5 |
The most economical location for the firm is
(A) P (B) Q (C) R (D) S
Ans: P
Sol:
Concept:
Total Cost = Fixed cost + Quantity × Variable cost
T = F + q × V
Calculation:
Given:
Quantity, q = 50,000 units/year
TP = F1 + q × V1 = 110,000 + 2 × 50,000 = 2, 10, 000/-
TQ = F2+ q × V2= 95,000 + 2.5 × 50,000 = 2, 20,000/-
TR = F3 + q × V3 = 80,000 + 3 × 50,000 = 2, 30, 000/-
TS = F4 + q × V4 = 75,000 + 3.5 × 50,000 = 2, 50, 000/-
∴ Total cost would be minimum for firm P. Hence, firm P will be most economical.