Question: A soft drink maker wishes to expand to a neighboring country. They want the product bottled in that country to evade political issues and to improve the local image of the product. They have recognized two options for the growth. The first is to build a highly automated plant. The economies of scale would permit them to generate 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 make a semi-automated plant which would cost $650,000 per year in fixed costs. Though, the cost to generate 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 favored?
b) Assume that the company believes that the demand would be 6,000,000 cans per year. Assume that all costs except the variable cost (sum of the production and distribution costs) for the highly automated method are certain and can’t change. What would the variable cost (the sum of production and distribution cost) per can for the highly automated method encompass to be so that the soft drinker maker is indifferent among the two types of plants?
c) Now assume that each alternative has a different capacity. Total estimated demand for the year is 5,300,000 if the company sells each can for $0.32. Though, only the highly automated method can produce and distribute this amount. When the semi-automated process is employed, the company would only be capable to produce and distribute 4,200,000 cans yearly. To offset the lower volume, the company will raise the price of each can to $0.35. It will be capable to sell all it produces at this price. By using all of the information presented in the problem, which method should it use? Explain why?