Company of textiles has two different production facilities

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Reference no: EM132184044

A manufacturing company of textiles has two different production facilities, both producing variations of a similar product. Both are located in the same state. When the VP of Finance was reviewing cost figures for both locations, it was noted that the average cost to operate at one location (location A) is much higher than the other (location B), although each produces variations of the same product based on customer orders and dissemination of such orders from a central ordering point (human operator) with no prioritization scheme in place. Now and in further review, the VP of Finance noted that at one location (location B), the marginal costs to produce are lower than at the other, even though the fixed costs are higher. Furthermore, closing one location over the other may actually create issues in terms of filling orders. Finally, and at the same time, the company is considering purchasing another location out of state that will convert raw materials such as cotton into basic materials which locations A and B will transform into finished products based on orders received. You are advising the VP of Finance on this matter. Should the location with the higher cost be closed or should operations be expanded? Finally, picking up the out-of-state location is a form of vertical integration. What are some of the reasons to do this, given the questionable operating costs of locations A versus B? Please develop your reasoning and explain if you would choose to close location A or expand operations through a vertical integration with the third location to supply locations A and B.

Reference no: EM132184044

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