2-2011=REVISION-CAL-FINAL=A - Chapter 8 Calculation Page 380 Evaluating Location Alternatives Common techniques 1 Locational cost-volume-profit analysis

2-2011=REVISION-CAL-FINAL=A - Chapter 8 Calculation Page...

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Page 380 Evaluating Location Alternatives Common techniques: 1. Locational cost-volume-profit analysis 2. Factor rating 3. Center of gravity method Transportation model Chapter 8 Calculation
Page 380 1.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
Page 381 Example: Cost-Profit- Volume Analysis Fixed and variable costs for four potential plant locations are shown below: Locatio n Fixed Cost per Year Variable Cost per Unit A \$250,000 \$11 B \$100,000 \$30 C \$150,000 \$20 D \$200,000 \$35
Page 381 Example: Cost-Profit- Volume Analysis
Page 381 Example: Cost-Profit- Volume Analysis B Superior C Superior A Superior
Page 382 Example: Cost-Profit- Volume Analysis Range approximations B Superior (up to 4,999 units) C Superior (>5,000 to 11,111 units) A superior (11,112 units and up) 000 , 5 10 000 , 50 30 000 , 100 20 000 , 150 B of Cost Total C of Cost Total = = + = + = Q Q Q Q 11 . 111 , 11 9 000 , 100 20 000 , 150 11 000 , 250 C of Cost Total A of Cost Total = = + = + = Q Q Q Q
Page 383 2. Factor Rating Factor Rating General approach to evaluating locations that includes quantitative and qualitative inputs Procedure: 1. Determine which factors are relevant 2. Assign a weight to each factor that indicates its relative importance compared with all other factors. • Weights typically sum to 1.00 1. Decide on a common scale for all factors, and set a minimum acceptable score if necessary 2. Score each location alternative 3. Multiply the factor weight by the score for each factor, and sum the results for each location alternative 4. Choose the alternative that has the highest composite score, unless it fails to meet the minimum acceptable score
Page 383 Example: Factor Rating A photo-processing company intends to open a new branch store. The following table contains information on two potential locations. Which is better? Scores (Out of 100) Factor Weight Alt 1 Alt 2 Proximity to existing source .10 100 60 Traffic volume .05 80 80 Rental costs .40 70 90 Size .10 86 92 Layout .20 40 70 Operating Cost .15 80 90 1.00
Page 383 Example: Factor Rating A photo-processing company intends to open a new branch store. The following table contains information on two potential locations. Which is better? Scores (Out of 100) Weighted Scores Factor Weigh t Alt 1 Alt 2 Alt 1 Alt 2 Proximity to existing source .10 100 60 .10(100) = 10.0 .10(60) = 6.0 Traffic volume .05 80 80 .05(80) = 4.0 .05(80) = 4.0 Rental costs .40 70 90 .40(70) = 28.0 .40(90) = 36.0 Size .10 86 92 .10(86) = 8.6 .10(92) = 9.2 Layout .20 40 70 .20(40) = 8.0 .20(70) = 14.0 Operating Cost .15 80 90 .15(80) = 12.0 .15(90) = 13.5 1.00 70.6 82.7
Page 384 3. Center of Gravity Method Center of Gravity Method Method for locating a distribution center that minimizes distribution costs Treats distribution costs as a linear function of the distance and the quantity shipped The quantity to be shipped to each destination is assumed to be fixed The method includes the use of a map that shows the locations of destinations The map must be accurate and drawn to scale A coordinate system is overlaid on the map to determine relative locations
Page 384 Center of Gravity Method

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