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Analyzing two expansion alternatives

Tasty Snacks Inc. a regional snack foods company (corn chips, potato chips, etc). in the northeast, is considering two alternative proposals for expansion into southeastern states. Alternative 1: Construct a single plant in Chattanooga, TN. with a monthly production capacity of 250,000 cases, a monthly fixed cost of $265,000 and a variable cost of $45 per case. Alternative 2: Construct three plants, one each in Birmingham, Alabama, Tallahassee, Florida, and Charlotte, North Carolina, with capacities of 100,000, 80,000 and 70,000, respectively, and monthly fixed costs of $180,000, $150,000, and $135,000 each. Variable costs would be only $44 per case because of lower distribution costs. To achieve these cost savings, sales from each smallest plant would be limited to demand within its home state. The total estimated monthly sales volume of 175,000 cases in these three southeaster states is distributed as follows: 70,000 cases in Florida, 60,000 cases in North Carolina, and 45,000 cases in Alabama.

A. Assuming a wholesale price of $50 per case, calculate the break even output quantities for each alternative

B.At a wholesale price of $50 per case in all states, and assuming sales at the projected levels, which alternative expansion scheme provides Tasty Snacks with the highest profit per month?

C. If sales increase to production capacities, which alternative would prove to be more profitable?

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Solution Preview

A. Assuming a wholesale price of $50 per case, calculate the breakeven output quantities for each alternative.

Alternative 1
Fixed Cost=F=$265000
Variable cost per unit=V=$45 per case
Price per case=P=$50
Break even output quantity=F/(P-V)=265000/(50-45)=53000 cases

Alternative 2
Total Fixed Costs=F=180000+150000+135000=$465000
Variable Cost per unit=V=$44
Price per ...

Solution Summary

Solution describes the methodology to determine most profitable alternative in the given scenario.