The Autoroller Company is situated near Detroit and specializes in producing ball bearings for the automotive industry. Since its inception in 1970 the company has been supplying both the Michigan and the Ohio automobile producers and has had increasing sales each year. In 1986 the company sold 600,000 units in Michigan and 200,000 units in Ohio. In 1987 the Ohio cus¬ tomers contracted for 400,000 units, and Michigan demand was expected to increase by 100,000 units. The Ohio customers indicated that they would need 600,000 units in 1988, and Michigan sales were expected to be 750,000 units in that year. The price per unit was increased to $8, effective January 1, 1987, for the whole of 1987. Since the Ohio customers ship other auto parts to their Michigan plants and return their trucks empty, they purchase at the same price as the Michigan customers at the Detroit plant of Autoroller.

Autoroller’s president, Mr. Blydt-Hansen, was excited about the increasing demand over the years but was concerned about plant capacity and the effect on profitability. The plant’s normal capacity was 600,000 units per year, but with a combination of either overtime or a second shift, both at a 50 percent premium on labor cost, demand has been met so far. A third shift was possible, and 1988 demand could be satisfied from the existing plant, although costs per unit were expected to increase further. Alternatively, Mr. Blydt-Hansen was considering whether or not to build an identical plant in Ohio. This project could be completed in time for start-up in the beginning of 1988 if a decision was reached immediately. The cost structure of the new plant in Ohio was expected to be identical to that of the existing Michigan plant.

The company accumulated the following data (all figures are thousands):

The company treasurer advises that hourly wages and all other costs have increased by about 10 percent per year for the last few years, and Autoroller has been able to increase its price each year. These price trends are expected to continue through at least 1988.
Advise Mr. Blydt-Hansen whether or not he should build the new plant in Ohio. Support your recommendation with discussion of all issues involved.

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1987 1984 1985 1986 (est.) Sales volume Total revenue 600 700 800 1,100 $3,600 $4,620 $5,800 $8,800 Costs: Direct labor 450 620 818 1,285 Raw materials 676 983 1,382 2,000 Variable overhead 900 1,240 1,636 2,400 Fixed overhead 1,127 1,240 1,364 1,400 Total costs $3,153 $4,083 $5,200 $7,085 Profit 447 537 600 1,715