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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.

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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