EXERCISE: COST ANALYSIS AND PRODUCTION LOCATION

Exercise 1: Given the average cost functions for rice production in Can Tho, Ho Chi Minh City, and Quang Ngai as follows:
• ACCT = 15N + 13L Price table of cost factors in the localities:
• ACHCM = 13N + 16L Cost Factor Can Tho HCMC Quang Ngai
• ACQN = 12N + 19L
Resources and Raw Materials (1,000 VND/unit) 100 130 120
Where: • L: Price of 1 unit of labor;
• N: Price of 1 unit of resources and raw materials used for production. Labor (1,000 VND/unit) 60 90 70

REQUIREMENTS:
(1). Is rice production in HCMC more efficient than importing from Can Tho and Quang Ngai? Why? • Given distances: CT - HCMC: 160 km; HCMC - QN: 640 km; CT - QN: 800 km.
• Calculate the rice consumption radius of the above production facilities. • Transport cost among the 3 localities: 1,000 VND/Ton/km.

(2). How will the results in question 1 change if, in addition to the above raw material and labor costs, the post-harvest processing of rice into commercial rice requires additional costs of 600,000
VND/Ton in Can Tho, 400,000 VND/Ton in Quang Ngai, and 300,000 VND/Ton in HCMC?

(1) Production cost of one unit:

• ACCT = 15 × 100 + 13 × 60 = 2280 • If imported from Can Tho, cost = 2280 + 160 = 2440
• ACHCM = 13 × 130 + 16 × 90 = 3130 • If imported from Quang Ngai, cost = 2770 + 640 = 3410
• ACQN = 12 × 120 + 19 × 70 = 1440 + 1330 = 2770 ⇨ Importing from CT will be more efficient (2440 < 3130), while importing from QN will be less efficient (3410 > 3130).
Consumption radius: Condition: PC1 + T1 × d1 = PC2 + T2 × d2 (With T = 1)
• Can Tho - HCMC: • Can Tho - Quang Ngai: • HCMC - Quang Ngai:
ACCT + T × dCT = ACHCM + T × dHCM ACCT + T × dCT = ACQN + T × dQN ACQN + T × dQN = ACHCM + T × dHCM
⇨ 2280 + dCT = 3130 + dHCM ⇨ 2280 + dCT = 2770 + dQN ⇨ 2770 + dQN = 3130 + dHCM
We have: dCT + dHCM = 160 We have: dCT + dQN = 800 We have: dQN + dHCM = 640
⇨ dCT = 160 - dHCM ⇨ dCT = 800 - dQN ⇨ dQN = 640 - dHCM
⇨ 2280 + 160 - dHCM = 3130 + dHCM ⇨ 2280 + 800 - dQN = 2770 + dQN ⇨ 2770 + 640 - dHCM = 3130 + dHCM
⇨ 2 × dHCM = -690 ⇨ 2 × dQN = 310 ⇨ 2 × dHCM = 280
⇨ dHCM = -345 (absurd) ⇨ dQN = 155 ⇨ dHCM = 140
⇨ dCT = 160 - (-345) = 505 (unsatisfactory because 505 > 160) ⇨ dCT = 800 - 155 = 645 ⇨ dQN = 640 - 140 = 500
⇨ There is no cost equilibrium point between Can Tho and HCMC.

(2) Additional costs:

• ACCT = 2280 + 600 = 2880 • If imported from Can Tho, cost = 2880 + 160 = 3040
• ACHCM = 3130 + 300 = 3430 • If imported from Quang Ngai, cost = 3170 + 640 = 3810
• ACQN = 2770 + 400 = 3170 ⇨ Importing from CT will be more efficient (3040 < 3430), while importing from QN will not be more efficient (3810 > 3430).
Consumption radius: Condition: PC1 + T1 × d1 = PC2 + T2 × d2 (With T = 1)
• Can Tho - HCMC: • Can Tho - Quang Ngai: • HCMC - Quang Ngai:
ACCT + T × dCT = ACHCM + T × dHCM ACCT + T × dCT = ACQN + T × dQN ACQN + T × dQN = ACHCM + T × dHCM
⇨ 2880 + dCT = 3430 + dHCM ⇨ 2880 + dCT = 3170 + dQN ⇨ 3170 + dQN = 3430 + dHCM
We have: dCT + dHCM = 160 We have: dCT + dQN = 800 We have: dQN + dHCM = 640
⇨ dCT = 160 - dHCM ⇨ dCT = 800 - dQN ⇨ dQN = 640 - dHCM
⇨ 2880 + 160 - dHCM = 3430 + dHCM ⇨ 2880 + 800 - dQN = 3170 + dQN ⇨ 3170 + 640 - dHCM = 3430 + dHCM
⇨ 2 × dHCM = -390 ⇨ 2 × dQN = 510 ⇨ 2 × dHCM = 380
⇨ dHCM = -195 (absurd) ⇨ dQN = 255 ⇨ dHCM = 190
⇨ dCT = 160 - (-195) = 355 (unsatisfactory because 355 > 160) ⇨ dCT = 800 - 255 = 545 ⇨ dQN = 640 - 190 = 450
⇨ There is no cost equilibrium point between Can Tho and HCMC.
Exercise 2: Given the average cost functions for producing a type of construction material in Hanoi (HN), Ho Chi Minh City (HCM), and Da Nang (DN) respectively as follows:
• ACHN = 9N + 9L Where: Given the distances: HN - HCM: 1720 km; HCM - DN: 960 km; HN - DN: 760 km.
• ACHCM = 9N + 11L • ACHN, ACHCM, ACDN are the average Transport cost along the reunification railway: 1,000 VND/ton/km.
• ACDN = 11N + 12L costs of producing 1 ton of construction The prices of input materials and labor in the localities are given in the following table:
material in HN, HCM, and DN respectively; Cost Factor Hanoi (HN) HCMC (HCM) Da Nang (DN)
• N: Price of 1 unit of input material;
Input Material (1,000 VND/unit) 170 180 140
• L: Price of 1 unit of labor.
Labor (1,000 VND/unit) 100 110 100

REQUIREMENTS:
(1). Suppose there are already 2 production facilities in HN and HCM. Should an additional production facility be located in DN? Why?
• Calculate the consumption radius of construction materials for the production facilities located in the above urban centers and illustrate the results with a graph.

(2). Currently, Hanoi can export 400,000 tons of construction materials annually with an export price at Hai Phong port of 5,500,000 VND/ton. Calculate the profit of the exporters knowing that
they have to buy construction materials in HN at a purchase price equal to 1.3 times the production cost there, and in addition to the product transport cost, they also must pay other costs equal to
45% of the purchase price of construction materials in HN? Given the distance from HN to Hai Phong is 102 km.

(1) Production cost at each location: • ACHN = 9N + 9L = 9 × 170 + 9 × 100 = 2430

• ACHCM = 9N + 11L = 9 × 180 + 11 × 110 = 2830 ⇨ ACHN < ACDN < ACHCM
• ACDN = 11N + 12L = 11 × 140 + 12 × 100 = 2740
Consumption radius: Condition: PC1 + T1 × d1 = PC2 + T2 × d2 (With T = 1)
• Hanoi – Da Nang: • Da Nang – HCMC: • HCMC – Hanoi:
ACHN + T × dHN = ACDN + T × dDN ACDN + T × dDN = ACHCM + T × dHCM ACHCM + T × dHCM = ACHN + T × dHN
⇨ 2430 + dHN = 2740 + dDN ⇨ 2740 + dDN = 2830 + dHCM ⇨ 2430 + dHN = 2830 + dHCM
We have: dHN + dDN = 760 We have: dDN + dHCM = 960 We have: dHN + dHCM = 1720
⇨ dHN = 760 - dDN ⇨ 2430 + 760 - dDN = 2740 + dDN ⇨ dDN = 960 - dHCM ⇨ 2740 + 960 - dHCM = 2830 + dHCM ⇨ dHN = 1720 - dHCM ⇨ 2430 + 1720 - dHCM = 2830 + dHCM
⇨ 2 × dDN = 450 ⇨ dDN = 225 ⇨ 2 × dHCM = 870 ⇨ dHCM = 435 ⇨ 2 × dHCM = 1320 ⇨ dHCM = 660
⇨ dHN = 760 - 225 = 535 ⇨ dDN = 960 - 435 = 525 ⇨ dHN = 1720 - 660 = 1060
⇨ Conclusion: An additional production facility should be located in Da Nang because its production cost is lower than that of HCMC and it has a large consumption radius, contributing to
minimizing the total production and transportation costs.
(2) Profit calculation:
• Production cost in HN: ACHN = 2430
• Purchase price of construction materials in HN: P_buy = 1.3 × 2430 = 3159
• Other costs: C_other = 45% × 3159 = 1421.55
• Transport cost: C_transport = 102
• Total cost: TC = 3159 + 1421.55 + 102 = 4682.55
• Profit per ton: Profit = 5500 - 4682.55 = 817.45
• Total profit of the exporters = 817.45 × 400,000 = 326,980,000 (thousand VND)