AquaPure, a company that produces water filtration systems, is planning to open a new manufacturing facility. Management has narrowed the search to three potential locations. The expected demand for water filtration systems is 8,000 units per year. The estimated fixed costs per year and variable costs per unit for each location are:

Location

Fixed Costs ($/year)

Variable Costs ($/unit)

Clearwater

80,000

12

Rivertown

100,000

10

Lakeside

120,000

8

Based on break-even analysis, which location should AquaPure choose for the new facility, and what is the total annual cost?

Question

AquaPure, a company that produces water filtration systems, is planning to open a new manufacturing facility. Management has narrowed the search to three potential locations. The expected demand for water filtration systems is 8,000 units per year. The estimated fixed costs per year and variable costs per unit for each location are:

Location

Fixed Costs ($/year)

Variable Costs ($/unit)

Clearwater

80,000

12

Rivertown

100,000

10

Lakeside

120,000

8

Based on break-even analysis, which location should AquaPure choose for the new facility, and what is the total annual cost?

BlackTom AI · Accepted Answer

AquaPure is evaluating where to locate a new manufacturing facility based on annual cost for producing 8,000 units. The given data: fixed costs and variable costs per location, and the annual demand of 8,000 units.

Option 1: Lakeside — Total Cost = $184,000. Here, fixed costs are $120,000 and variable costs are $8 per unit. The total cost calculation is Fixed + (Variable × Quantity) = 120,000 + (8 × 8,000) = 120,000 + 64,000 = 184,000. This option yields a total annual cost of 184,000, which is higher than the others when you compare all options.

Option 2: Rivertown — Total Cost = $180,000. Rivertown has fixed costs of $100,000 and variable costs of $10 per unit. The total cost is 100,000 + (10 × 8,000) = 100,000 + 80,000 = 180,000. This is higher than the Clearwater option but lower than Lakeside, placing it in the middle of the cost spectrum.

Option 3: Clearwater — Total Cost = $176,000. Clearwater has fixed costs of $80,000 and variable costs of $12 per unit. The total cost is 80,000 + (12 × 8,000) = 80,000 + 96,000 = 176,000. Among the three locations, this yields the smallest total annual cost so far, due to the combination of relatively low fixed costs despite higher per-unit costs.

Option 4: Clearwater — Total Cost = $176,000. This mirrors the calculation shown in Option 3, confirming the same result for Clearwater when using fixed costs of 80,000 and variable costs of 12 per unit with 8,000 units.

To compare, you multiply the annual demand by the per-unit variable cost to get the variable portion, then add the fixed costs to obtain the total annual cost for each site. Lakeside has the highest total because its fixed costs are highest and its per-unit cost is still above Rivertown's. Rivertown’s total is next because while its fixed costs are higher than Clearwater’s, its per-unit cost is lower than Clearwater’s, reducing the variable portion. Clearwater ends up with the lowest total due to its combination of the lowest fixed costs, which more than offsets its higher per-unit cost, resulting in 176,000 total. The option with 176,000 is the most cost-efficient choice among the three given under the break-even framework for 8,000 units.

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