1.Blue Computers, a major server manufacturer in the United
States, currently has plants in Kentucky and Pennsylvania.
The Kentucky plant has a capacity of 1 million units a year,
and the Pennsylvania plant has a capacity of 1.5 million
units a year. The firm divides the United States into five
markets: northeast, southeast, midwest, south, and west.
Each server sells for $1,000. The firm anticipates a 50 percent
growth in demand (in each region) this year (after
which demand will stabilize) and wants to build a plant
with a capacity of 1.5 million units per year to accommodate
the growth. Potential sites being considered are in
North Carolina and California. Currently the firm pays federal,
state, and local taxes on the income from each plant.
Federal taxes are 20 percent of income, and all state and
local taxes are 7 percent of income in each state. North Carolina
has offered to reduce taxes for the next 10 years from
7 percent to 2 percent. Blue Computers would like to take
the tax break into consideration when planning its network.
Consider income over the next 10 years in your analysis.
Assume that all costs remain unchanged over the 10 years.
Use a discount factor of 0.1 for your analysis. Annual fixed
costs, production and shipping costs per unit, and current
regional demand (before the 50 percent growth) are shown
in Table 5-13.
a. If Blue Computers sets an objective of minimizing total
fixed and variable costs, where should it build the new
plant? How should the network be structured?
b. If Blue Computers sets an objective of maximizing aftertax
profits, where should it build the new plant? How
should the network be structured?
TABLE 5-13 Variable Production and Shipping Costs for Blue Computers
Variable Production and Shipping Cost ($/Unit)
Northeast Southeast Midwest South West Cost (Million $)
Kentucky 185 180 175 175 200 150
Pennsylvania 170 190 180 200 220 200
N. Carolina 180 180 185 185 215 150
California 220 220 195 195 175 150
Demand (thousands of units/month)
700 400 400 300 600
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