Evaluating Location Alternatives
Common Techniques:
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Location cost-volume-profit analysis
Factor Rating
Center of Gravity Method
Transportation Model
LOCATION COST-VOLUME-PROFIT ANALYSIS
The use of cost-volume analysis to make an economic comparison of location alternatives.
Three Steps:
1. Determine the fixed and variable cost for each location.
2. Plot the cost for each location.
3. Select location with the lowest total cost for expected production volume.
Example:
Formula: Total Cost = Fixed Cost + (Variable Cost x Volume)
Location
A
B
C
Fixed Cost
$ 40,000
$45,000
$54,000
Variable Cost
$ 24
$35
$ 30
Quantity or
Volume of Output
4,000
4,000
4,000
Total Cost
136,000
185,000
174,000
FACTOR RATING METHOD
A location method that instills objectivity into the process of identifying hard to evaluate costs
Six Steps:
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6.
Develop a list of relevant factors called key success factors.
Assign a weight to each factor.
Develop a scale for each factor.
Score each location for each factor.
Multiply score by weights for each factor for each location.
Recommend the location with the highest point score