Question & Answer: SunOil, a petrochemical products manufacturer, with sales in North America, South America,…..

SunOil, a petrochemical products manufacturer, with sales in North America, South America, and Europe is looking to setup plants that meet demand in these locations. Demand in North America, South America, and Europe are 12, 8, and 14 million units respectively. The following table shows variable costs, which include production, inventory, and transportation costs (including tariffs and duties) for manufacturing one million products. And the table also shows fixed costs to build plants in respective regions. Low capacity plants can build 10 million units a year, and High capacity plants 20 million units. The assumption is that variable costs grow linearly with the quantity shipped or produced. All the costs are in USD

*Inputs – Costs, Capacities, Demands*
	Demand Region Production and Transportation Cost per 1,000,000 Units
Supply Region	N. America	S. America	Europe	Fixed Cost ($)	Low Capacity	Fixed Cost ($)	High Capacity
N. America	81	92	101	6,000	10	9,000	20
S. America	117	77	108	4,500	10	6,750	20
Europe	102	105	95	6,500	10	9,750	20
Demand	12	8	14

(a) What will be the minimum total cost to setup and operate the network? Explain the solution in terms of total cost, plants set up, and volumes produced, and delivered to various demand points.

(b) What happens if there is no difference in fixed costs between a low capacity and a high capacity plants in a given supply region? Explain the solution.

( c) Explain the solution if the values in the first row (‘N. America’) are given as:

81 75 85 3500 10 6000 20

Expert Answer

a) Total cost, Plant set up and volumes produced and delivered to demand points are mentioned in the beow image

B) If there is no difference in fixed costs for plant set up, the configuration doesnt change but the cost will decrease

C) If there is a change in values in first row, the configuration doesnt change but the cost will decrease

Refer to this similar question for better understanding

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