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
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Locational Cost-Profit-Volume Analysis
• For a cost analysis, compute the total cost for
each alternative location:
Total Cost  FC  v  Q
where
FC  Fixed cost
v  Variable cost per unit
Q  Quantity or volume of output
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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
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Example: Cost-Profit-Volume Analysis
• Range approximations
– B Superior (up to 4,999 units)
Total Cost of C  Total Cost of B
150,000  20Q  100,000  30Q
50,000  10Q
Q  5,000
– C Superior (>5,000 to 11,111 units)
Total Cost of A  Total Cost of C
250,000  11Q  150,000  20Q
– A superior (11,112 units and up)
100,000  9Q
Q  11,111.11
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Example: Cost-Profit-Volume Analysis
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Example: Cost-Profit-Volume Analysis
B Superior
C Superior
A Superior
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