Question

The Martin-Beck Company operates a plant in St. Louis with an annual capacity of 30,000 units. Product is shipped to regional distribution centers located in Boston, Atlanta, and Houston. Because of an anticipated increase in demand, Martin-Beck plans to increase capacity by constructing a new plant in one or more of the following cities: Detroit, Toledo, Denver, or Kansas City. The estimated annual fixed cost and the annual capacity for the four proposed plants are as follows:
Proposed Plant Annual Fixed Cost Annual Capacity
Detroit $175,000 20,000
Toledo $300,000 30,000
Denver $375,000 40,000
Kansas City $500,000 10,000

Answer 1

The best option for Martin-Beck would be to construct a plant in Toledo. This plant would provide the most cost-effective option, with an annual cost of $300,000 and an annual capacity of 30,000.

This is higher than the current capacity of the existing plant in St. Louis, and would be sufficient to meet the anticipated increase in demand. Furthermore, Toledo would be the closest of the proposed locations to the regional distribution centers, thus providing the shortest delivery times.

To determine which proposed plant would be the most cost-effective option for Martin-Beck, the company would need to calculate the variable costs associated with shipping product to the regional distribution centers from each of the four proposed plants.

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