Location Planning and Analysis

Prepared by: Bhakti JoshiPresented on: July 18, 2013

Places and Products/Service• In India, KFC and Pizza Hut were first launched in Bangalore and

McDonald’s was first launched in New Delhi– Jain cakes and Jain pav bhaji were introduced in Mulund in late

1980s• India’s first nuclear weapons test was conducted at Pokhran,

Rajasthan• I and many train commuters purchase food packets, sweets, and

(sometimes) breakfast from Mumbai’s local trains• Fort area in Mumbai occupies headquartered offices for major

banks (Indian & otherwise)• A photocopy shops are in close proximity to courts and banks• Kiraana shops are present mostly around residential homes• Vegetable vendors around my residential surroundings always sell a

bundle of spinach along with dill leaves packed together

Influencing Factors

• Customer Proximity• Presence of similar businesses• Availability of supporting skills• Role of government• Suppliers of inputs• Climate and effect on environment• Frequency and regularity in utility of

product/service

Key Factors for Identifying Location

MANUFACTURING SERVICES

Availability of Energy & Water

Proximity to Raw materials

Transportation Cost

TrafficPatterns

Proximity to Markets

Location of Competitors

MINIMAL COSTS OF PRODUCTION OR PROVISIONS

Identify What?

COUNTRY REGION COMMUNITY SITE

• Economic Scenario

• Political Stability

• Policy / Regulations

• Trade relations

• Technology• Human

Resources

• Location to Raw Materials

• Location to Markets

• Industry or Labour Relations

• Climatic conditions

• Educational Institutions

• Health-care systems

• Distribution channels

• Transportation• Recreational

Activities• Local Policies /

Regulations• Environmental

conditions

• Land• Means of

Transportation• Zoning (For

example, planning for residential quarters, electricity distribution, water distribution, etc.)

• Determines volume of production• Focuses on break-even analysis• Considers variable and fixed costs of production

Location Evaluation Approaches

Location Cost-Volume-Profit

Analysis

Factor Rating

Centre of Gravity Method

• Determines mathematical rating of location factors• Considers qualitative and quantitative factors• Assign weights to each factor

• Determines travel time for shipping or distribution

• Involves a map and coordinate system

• Three Elements– Cost: Cost of making the product or providing service– Volume: The number of units of products produced or hours/units of service delivered– Profit: Selling Price of product/service - Cost to make product/provide service = Operating Profit

• Fixed and variable costs are available easily• Determine expected output as per the costs• Plot total cost lines for each location• Plot alternative cost lines• Find maximum and minimum costs for expected levels of output

Assumptions• Fixed costs are constant• Variable Costs are linear• There is only one product involved• Total Cost = FC + v(Q), where FC=Fixed Cost, v=variable cost per unit, Q (Number of

Units)

Cost-Volume-Profit Analysis

Cost-Volume-Profit Analysis: Example

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

Questions1. Plot the total costs for these locations on a single graph if the expected output

level is 10,000 units per year2. Identify the range of output for each of the locations3. If expected output at the selected location were 8,000 units per year, which

location would provide the lowest total cost

Example: Question 1Location Fixed Cost

Per Year ($)Variable Cost Per Year ($)

Fixed Cost + Variable Cost = Total Cost ($)

A 250,000 11 * (10,000) 250,000 + 110,000 = 360,000

B 100,000 30 * (10,000) 100,000 + 300,000 = 400,000

C 150,000 20 * (10,000) 150,000 + 200,000 = 350,000

D 200,000 35 * (10,000) 200,000 + 350,000 = 550,000

Annual Output in 10,000s

Tota

l Ann

ual C

osts

($’0

00s)

100-

200-

300-

400-

500-

600-

700-

800-

|2

|0

|4

|6

|8

|10

|12

|14

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|18

Step 1: Plot only fixed cost on y-axis for each location (at Output = 0)Step 2: For each location plot total cost across x-axis (at 10,000 units of output)

A

B

C D

Example: Question 2

Annual Output in 10,000s

Tota

l Ann

ual C

osts

($’0

00s)

100-

200-

300-

400-

500-

600-

700-

800-

|2

|0

|4

|6

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A

B

C D

• Locations which may yield lower costs would be A, B or C

• Location D will never yield lower costs• Total Cost = FC + v(Q), where FC=Fixed Cost,

v=variable cost per unit, Q (Number of Units)

B Superior C Superior A Superior

Determine Costs Functions for Locations A, B and CLocation A: 250,000 + 11 QLocation B: 100,000 + 30 QLocation C: 150,000 + 20Q

Example: Question 2 Contd…Determine Costs Functions for Locations A, B and CLocation A: 250,000 + 11 QLocation B: 100,000 + 30 QLocation C: 150,000 + 20Q

As per the graph, conduct simultaneous equations assuming Q being equal in both cases:

Case 1: Locations B and C (B) (C)

100,000 + 30 Q = 150,000 + 20Q

30 Q – 20Q = 150,000-100,000; Q = 5,000 units per year

Case 2: Locations C and A(C) (A)

150,000 + 20Q = 250,000 + 11 QQ = 11,111 units per year

Cost-Volume-Profit Analysis-Example

Cost

Volume of Sales

Revenue

Total Cost for Alt A

Total Cost for Alt B

V*

Fixed Cost for Alt B

Fixed Cost for Alt A

Factor Rating

1. Determine relevant and important factors2. Assign a weight to each factor with all weights totalling

1.003. Determine common scale for all factors4. Score each alternative5. Adjust score using weights (multiply factor weight by score

factor); add up scores for each alternative.6. The alternative with the highest score is considered the

best option.7. Minimum scores may be established to set a particular

standard, though this is not necessary.

Factor Rating: ExampleFactors LOCATION X LOCATION Y

Weight Score Weighted Factor

Score Weighted Factor

Manufacturing Costs

0.5 8 4.0 7 3.5

Standard of Living

0.1 7 0.7 4 0.4

Tax Concessions 0.2 5 1.0 8 1.6

Labour availability

0.2 5 1.0 5 1.0

Total Score 1.0 6.7 6.5

Centre for Gravity Method

• Distribution cost is a linear function of the distance and quantity shipped

• It consists of a linear map and a coordinate system• Coordinate points being treated as set of numerical

values when calculating averages• If the quantities shipped to each location are equal ,

the centre of gravity is found by taking the averages of the x and y coordinates

• If the quantities shipped to each location are different , a weighted average must be applied

Centre for Gravity Method: Example

• Consider three locations A, B and C • Positions of A, B, and C are of coordinates (5,3), (4,2) and

(3,6) respectively on a map [(A,B) format, where A is value on x-axis and B is value on y-axis

• Possible central location on the map could be [(5+4+3)/3,(3+2+6)/3]…i.e. (4,3.3) making closer to location B

• However, A receives 200 customers, B receives 75 and C received 25 customers respectively

• Weighted formula as per customers received is considered: i.e. (5*200)+(4*75)+(3*25) which equals 4.58

200 + 75 + 25

sources

• http://www.cliffsnotes.com/more-subjects/accounting/accounting-principles-ii/cost-volume-profit-relationships/cost-volume-profit-analysis

• http://www.wyzant.com/resources/lessons/accounting/cost-volume-profit

• http://classes.bus.oregonstate.edu/spring-07/ba422/Management%20Accounting%20Chapter%207.htm

• http://www.wikihow.com/Do-Cost-Volume-Profit-Analysis

Email: bhaktij@gmail.comWebsite:

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