Fall Line Inc. Is A Great Falls Montana Manufacturer

Fall Line Inc Is A Great Falls Montana Manufacturer Of A Variety

Fall Line Inc is considering four potential locations—Aspen, Colorado; Medicine Lodge, Kansas; Broken Bow, Nebraska; and Wounded Knee, South Dakota—for establishing a new manufacturing plant for downhill skis. The company aims to analyze the total costs associated with each location, determine the most cost-effective options based on expected production volumes, and evaluate which location would generate the highest profit considering fixed and variable costs, demand forecasts, and projected selling prices. This comprehensive analysis involves plotting total cost curves, identifying break-even points, comparing profit potentials, and assessing the sensitivity of location choice to sales volume fluctuations.

Paper For Above instruction

The decision of where to establish a new manufacturing plant is critical for companies like Fall Line Inc., which produces downhill skis. An optimal location not only minimizes costs but also aligns with market demand and profitability goals. This paper examines the cost structures and potential profitability of four candidate locations—Aspen, Colorado; Medicine Lodge, Kansas; Broken Bow, Nebraska; and Wounded Knee, South Dakota—by analyzing fixed and variable costs, demand projections, and selling prices to determine the most advantageous site.

Understanding Cost Structures and Their Impact on Location Choice

The initial step involves understanding and visualizing the total costs associated with each location. Total cost (TC) for each site is comprised of fixed costs (FC) and variable costs (VC) multiplied by the number of skis produced (Q), expressed as TC = FC + VC * Q. Plotting these curves on a graph with production volume on the x-axis and total costs on the y-axis provides a clear comparison of cost behavior across locations.

Aspen, despite higher fixed and variable costs, is likely to benefit from higher demand and selling prices. Conversely, locations such as Medicine Lodge, Broken Bow, and Wounded Knee may have lower fixed costs but might suffer from lower demand and prices. The point at which the total costs of different locations intersect identifies the break-even volume for each site—the production level where costs are equal, and beyond which one location becomes more cost-effective than another.

Plotting Total Cost Curves and Identifying Favorable Ranges

To accurately compare the locations, we plot the total cost curves for each on a single graph. For illustrative purposes, assume the following hypothetical data based on typical fixed and variable costs:

- Aspen: FC = $2,000,000; VC per pair = $200

- Medicine Lodge: FC = $1,000,000; VC per pair = $150

- Broken Bow: FC = $1,200,000; VC per pair = $170

- Wounded Knee: FC = $800,000; VC per pair = $180

The total cost functions become:

- Aspen: TC = 2,000,000 + 200Q

- Medicine Lodge: TC = 1,000,000 + 150Q

- Broken Bow: TC = 1,200,000 + 170Q

- Wounded Knee: TC = 800,000 + 180Q

Plotting these lines reveals the volume ranges where each location minimizes total costs:

- Wounded Knee is most cost-effective at low production volumes due to its low fixed costs.

- As volume increases, Medicine Lodge may become more competitive.

- At even higher volumes, Broken Bow or Aspen might be preferred despite their higher fixed costs because of their lower variable costs and demand prospects.

The exact intersection points depend on the precise cost parameters.

Incorporating Demand and Price Projections

Fall Line expects higher demand and prices in Aspen, which translates into higher expected revenues. The projected selling prices per pair are assumed as follows:

- Aspen: $600

- Medicine Lodge: $550

- Broken Bow: $530

- Wounded Knee: $510

The demand projections suggest maximum feasible production volumes for each location, which are critical for profit analysis.

Calculating Break-Even Points and Profitability

Break-even volume (Q*) is where total revenue equals total cost:

Q* = FC / (Price - VC per unit)

For each location:

- Aspen: Q* = 2,000,000 / (600 - 200) = 2,000,000 / 400 = 5,000 pairs

- Medicine Lodge: Q* = 1,000,000 / (550 - 150) = 1,000,000 / 400 = 2,500 pairs

- Broken Bow: Q* = 1,200,000 / (530 - 170) = 1,200,000 / 360 ≈ 3,333 pairs

- Wounded Knee: Q* = 800,000 / (510 - 180) = 800,000 / 330 ≈ 2,424 pairs

These points indicate the minimum sales volume at which each location becomes profitable. For instance, Aspen requires a higher sales volume to break even but offers higher revenue per unit, potentially leading to more significant profits at larger scales.

Determining the Most Profitable Location

To identify the location yielding the highest total profit annually, we compute the profit function:

Profit = (Price * Q) - Total Cost

By substituting the specific parameters and feasible production volumes, it becomes evident that despite higher fixed costs, Aspen's higher selling price and demand could lead to superior profitability at higher sales volumes—assuming projected demand is met.

In particular, the maximum profit scenarios occur when sales volume exceeds the break-even point significantly. Given the highest projected demand and prices, Aspen likely results in the highest annual profit if the sales forecasts are accurate. Conversely, at low projected demand, locations like Wounded Knee could be more advantageous due to lower fixed costs and break-even volumes.

Sensitivity of Location Decision to Forecast Accuracy

The choice of location is sensitive to sales volume forecasts because profits depend heavily on actual demand realization versus projections. If demand in Aspen falls short of expectations, the higher fixed costs could erode profitability, making other locations more attractive.

To evaluate the minimum sales volume at which Aspen becomes the optimal location, we compare profit functions across locations at various sales levels. When Aspen’s profit surpasses that of others, it indicates the sales threshold necessary for it to be the preferred site. From the break-even calculations, Aspen becomes advantageous once sales exceed approximately 5,000 pairs—its break-even volume—and if actual sales are projected to be higher, it remains the most profitable choice.

Conclusion

The analysis reveals that choosing the optimal location for Fall Line Inc.'s new plant involves balancing fixed and variable costs, demand projections, and competitive pricing strategies. Plotting total cost curves helps visualize cost behavior across different production volumes, while calculating break-even points guides strategic decision-making. Aspen, despite higher initial costs, offers potential for the highest profits at larger sales volumes due to its premium market positioning. However, the decision remains sensitive to demand forecasts, underscoring the importance of accurate market analysis and flexible planning to mitigate risks associated with demand fluctuations.

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