Objective of minimizing total fixed and variable costs

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Reference no: EM131275853

Blue Computers, a major server manufacturer in the United States, currently has plants in Kentucky and Pennsylvania. The Kentucky plant has a capacity of 1 million units a year, and the Pennsylvania plant has a capacity of 1.5 million units a year. The firm divides the United States into five markets: northeast, southeast, midwest, south, and west. Each server sells for $1,000. The firm anticipates a 50 per- cent growth in demand (in each region) this year (after which demand will stabilize) and wants to build a plant with a capacity of 1.5 million units per year to accommo- date the growth. Potential sites being considered are in North Carolina and California. Currently the firm pays fed- eral, state, and local taxes on the income from each plant. Federal taxes are 20 percent of income, and all state and local taxes are 7 percent of income in each state. North Car- olina has offered to reduce taxes for the next 10 years from 7 percent to 2 percent. Blue Computers would like to take the tax break into consideration when planning its network. Consider income over the next 10 years in your analysis. Assume that all costs remain unchanged over the 10 years. Use a discount factor of 0.1 for your analysis. Annual fixed costs, production and shipping costs per unit, and current regional demand (before the 50 percent growth) are shown in Table 5-13.

a. If Blue Computers sets an objective of minimizing total fixed and variable costs, where should it build the new plant? How should the network be structured?

b. If Blue Computers sets an objective of maximizing after- tax profits, where should it build the new plant? How should the network be structured?

Reference no: EM131275853

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