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Allocating Production Resources at American Company

#1) An American Company that sells consumer electronics products has manufacturing facilities in Mexico, Taiwan, and Canada. The average hourly wage, output, and annual overhead cost for each site are as follows:

Mexico Taiwan Canada
Hourly wage rate $1.50 $3.00 $6.00
Output per person 10 18 20
Fixed overhead cost $150,000 $90,000 $110,000

a. Given these figures, is the firm currently allocating its production resources optimally? If not, what should it do? (Consider output per person as a proxy for marginal product). Suppose the firm wants to consolidate all its manufacturing into one facility. Where should it locate? Explain.

Solution Preview

Since the current allocation is not provided we can work out the quantity at which a particular location is preferred over the other. Let x is the quantity for production at a location then
Mexico Taiwan Canada
Hourly wage rate $1.50 $3.00 $6.00
Output per person 10 18 20
Fixed overhead cost $150,000 $90,000 ...

Solution Summary

Production Resources are assessed.

$2.19