Kimberly Clark in Neenah, WI manufactures paper towels and sells them for $1.00 per roll. The company’s variable cost is $0.30 per roll. The Neenah location has a fixed cost of $20,000 (rent, utilities, taxes, etc.) per month. Kimberly Clark’s marketing department has estimated the following demand scenarios and probability of each level of demand for October, 2017. Demand Level Rolls of Paper Towels Sold Probability Low Demand 2,500,000 30% Medium Demand 4,000,000 40% High Demand 9,000,000 30%
a) How many paper towels does Kimberly Clark need to sell each month to break even?
b) What is Kimberly Clark’s total monthly cost (fixed plus variable) if there is medium demand for paper towels in October?
c) What is the expected value of Kimberly Clark’s cost to make paper towels in October?
d) The company is considering moving to a new location in Eau Claire, WI that has a fixed cost of $30,000 per month, but variable costs to produce paper towels would by $0.22 per roll at this new location. At what output level would Kimberly Clark be indifferent between its Neenah location and the Eau Claire location?
e) Based on your answer from part d and the forecast for October, would it be cheaper for Kimberly Clark to produce out of the Eau Claire location in October?