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