Cost-Benefit Analysis
A soft drink maker wants to expand into a neighboring
country. They want the product bottled in that country to avoid political
issues and to enhance the local image of the product. They have identified two
options for the expansion. The first is to build a highly automated process.
The economies of scale would allow them to produce a can of soda for $0.04 and
the distribution costs would be $0.02 per can. This facility would cost $1
million per year in fixed costs. The second option would be to build a
semi-automated plant that would cost $650,000 per year in fixed costs. However,
the cost to produce a can would be $0.07 and the distribution cost would be
$0.04 per can.
a) Over what range of product would each plant be preferred?
b) Suppose the company believes that the demand would be
approximately 6,000,000 cans per year. Suppose all costs except the variable
cost (sum of the production and distribution costs) for the highly automated
process are certain and can not change. What would the variable cost (the sum
of the production and distribution cost) for the highly automated process have
to be so that the soft drinker maker is indifferent between the two types of
plants?
c) Now suppose each alternative has a different capacity. The
total estimated demand for the year is 5,000,000. However, only the highly
automated process can produce and distribute this amount. If the semi-automated
process is used, the company would only be able to produce and distribute
4,200,000 cans annually. If the company can sell each can for $0.35, which
process should it use? Why?
