The Blair Company's three assembly plants are located in California, Georgia, and New Jersey. Previously, the company purchased a major subassembly, which becomes part of the final product, from an outside firm. Blair has decided to manufacture the subassemblies within the company and must now consider whether to rent one centrally located facility (e.g., in Missouri, where all the subassemblies would be manufactured) or to rent three separate facilities, each located near one of the assembly plants, where each facility would manufacture only the subassemblies needed for the nearby assembly plant. A single, centrally located facility, with a production capacity of 18,000 units per year, would have fixed costs of $900,000 per year and a variable cost of $250 per unit. Three separate decentralized facilities, with production capacities of 8,000, 6,000, and 4,000 units per year, would have fixed costs of $475,000, $425,000, and $400,000, respectively, and variable costs per unit of only $225 per unit, owing primarily to the reduction in shipping costs. The current production rates at the three assembly plants are 6,000, 4,500, and 3,000 units, respectively. Assuming that the current production rates are maintained at the three assembly plants, which alternative should management select? O Single, centrally located facility O Three separate decentralized facilities If demand for the final product were to increase to production capacity, which alternative would be more attractive? O Three separate decentralized facilities O Single, centrally located facility
The Blair Company's three assembly plants are located in California, Georgia, and New Jersey. Previously, the company purchased a major subassembly, which becomes part of the final product, from an outside firm. Blair has decided to manufacture the subassemblies within the company and must now consider whether to rent one centrally located facility (e.g., in Missouri, where all the subassemblies would be manufactured) or to rent three separate facilities, each located near one of the assembly plants, where each facility would manufacture only the subassemblies needed for the nearby assembly plant. A single, centrally located facility, with a production capacity of 18,000 units per year, would have fixed costs of $900,000 per year and a variable cost of $250 per unit. Three separate decentralized facilities, with production capacities of 8,000, 6,000, and 4,000 units per year, would have fixed costs of $475,000, $425,000, and $400,000, respectively, and variable costs per unit of only $225 per unit, owing primarily to the reduction in shipping costs. The current production rates at the three assembly plants are 6,000, 4,500, and 3,000 units, respectively. Assuming that the current production rates are maintained at the three assembly plants, which alternative should management select? O Single, centrally located facility O Three separate decentralized facilities If demand for the final product were to increase to production capacity, which alternative would be more attractive? O Three separate decentralized facilities O Single, centrally located facility
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:The Blair Company's three assembly plants are located in California, Georgia, and New Jersey. Previously, the company purchased a major
subassembly, which becomes part of the final product, from an outside firm. Blair has decided to manufacture the subassemblies within the company
and must now consider whether to rent one centrally located facility (e.g., in Missouri, where all the subassemblies would be manufactured) or to rent
three separate facilities, each located near one of the assembly plants, where each facility would manufacture only the subassemblies needed for the
nearby assembly plant. A single, centrally located facility, with a production capacity of 18,000 units per year, would have fixed costs of $900,000 per
year and a variable cost of $250 per unit. Three separate decentralized facilities, with production capacities of 8,000, 6,000, and 4,000 units per year,
would have fixed costs of $475,000, $425,000, and $400,000, respectively, and variable costs per unit of only $225 per unit, owing primarily to the
reduction in shipping costs. The current production rates at the three assembly plants are 6,000, 4,500, and 3,000 units, respectively.
Assuming that the current production rates are maintained at the three assembly plants, which alternative should management select?
O Single, centrally located facility
O Three separate decentralized facilities
If demand for the final product were to increase to production capacity, which alternative would be more attractive?
O Three separate decentralized facilities
O Single, centrally located facility
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