Evaluating Location Alternatives

Three techniques that are helpful in evaluating location alternatives: Locational cost-profit-volume analysis, factor rating, and center of gravity method.

1. LOCATIONAL COST-PROFIT-VOLUME ANALYSIS
The economic comparison of location alternatives is facilitated by the use of cost-profit-volume analysis. The analysis can be done numerically or graphically.

Procedure: 1. Determine the fixed and variable cost associated with each location alternative. 2. Plot the total-cost lines for all location alternatives on the same graph. 3. Determine which location will have the lowest total cost for the expected level of output. Alternatively, determine which location will have the highest profit.

This method assumes the following: 1. Fixed costs are constant for the range of probable output 2. Variable costs are linear for the range of probable output. 3. The required level of output can be closely estimated. 4. Only one product is involved.

For a cost analysis, compute the total cost for each location.
Total cost=FC+V ×Q
Where
FC = Fixed cost
V = Variable cost per unit
Q = Quantity or volume of output
Example1:
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 | a. Plot the total-cost lines for these locations on a single graph. b. Identify the range of output for which each alternative is superior.(lowest total cost) c. If expected output at the selected location is to be 8,000 units per year, which location would provide the lowest total cost.

Solution: a. To plot the total-cost lines, select an output that is approximately equal to the expected output level (e.g., 10,000 units per year). Compute