Chapter 8 - Part 2

# Chapter 8 - Part 2 - Location Planning and Analysis –...

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Unformatted text preview: Location Planning and Analysis – Part 2 Chapter 8 Evaluating Location Alternatives Common techniques: Locational cost-volume-profit analysis Factor rating Center of gravity method Transportation model Locational Cost-Profit-Volume Analysis Locational Cost-Profit-Volume Analysis (Also called Break-Even Analysis in other settings.) Technique for evaluating location choices in economic terms Steps: 1. Determine the fixed and variable costs for each alternative. 2. Plot the total-cost lines for all alternatives on the same graph. 3. Determine the location that will have the lowest total cost (or highest profit) for the expected level of output. Locational Cost-Profit-Volume Analysis Assumptions 1. Fixed costs are constant for the range of probable output. 2. Variable costs are linear for the range of probably output. 3. The required level of output can be closely estimated. 4. Only one product is involved. Locational Cost-Profit-Volume Analysis For a cost analysis, compute the total cost for each alternative location: output of or volume Quantity unit per cost Variable cost Fixed FC where FC Cost Total = = = × + = Q v Q v Example: Cost-Profit-Volume Analysis Fixed and variable costs for four potential plant locations are shown below: Location Fixed Cost per Year Variable Cost per Unit A \$250,000 \$11 B \$100,000 \$30 C \$150,000 \$20 D \$200,000 \$35 Example: Cost-Profit-Volume Analysis Location Fixed Cost per Year Variable Cost per Unit A \$250,000 \$11 B \$100,000 \$30 C \$150,000 \$20 D \$200,000 \$35 Example: Cost-Profit-Volume Analysis B Superior C Superior A Superior Example: Cost-Profit-Volume Analysis...
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Chapter 8 - Part 2 - Location Planning and Analysis –...

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