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.