Location Planning and

Analysis
Prepared by: Bhakti Joshi
Presented on: July 18, 2013

Places and Products/Service

In India, KFC and Pizza Hut were first launched in
Bangalore and McDonalds was first launched in New
Delhi
Jain cakes and Jain pav bhaji were introduced in
Mulund in late 1980s
Indias first nuclear weapons test was conducted at
Pokhran, Rajasthan
I and many train commuters purchase food packets,
sweets, and (sometimes) breakfast from Mumbais
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

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
MANUFACTURIN
G

SERVICES

Availability of Proximity to Transportation Traffic Proximity Location of

Energy & WaterRaw materials
Patterns to Markets
Competitors
Cost

MINIMAL COSTS OF
PRODUCTION OR
PROVISIONS

Identify What?
COUNTRY
Economic
Scenario
Political
Stability
Policy /
Regulatio
ns
Trade
relations
Technolog
y
Human
Resources

REGION
Location
to Raw
Materials
Location
to Markets
Industry
or Labour
Relations
Climatic
conditions

COMMUNI
TY
Educational
Institutions
Health-care
systems
Distribution
channels
Transportati
on
Recreationa
l Activities
Local
Policies /
Regulations
Environmen
tal

SITE
Land
Means of
Transportatio
n
Zoning (For
example,
planning for
residential
quarters,
electricity
distribution,
water
distribution,
etc.)

Location Evaluation
Approaches
Location
Cost-VolumeProfit Analysis

Determines volume of production

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

Factor Rating

Determines mathematical rating of

location factors
Considers qualitative and quantitative
factors
Assign weights to each factor

Centre of
Gravity
Method

Determines travel time for shipping or

distribution
Involves a map and coordinate system

Cost-Volume-Profit Analysis
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:
Example
Location

Fixed Cost Per Year

($)

Variable Cost Per

Unit ($)

250,000

11

100,000

30

150,000

20

200,000

35

Questions
1. Plot the total costs for these locations on a single graph if
the expected output level is 10,000 units per year
2. Identify the range of output for each of the locations
3. If expected output at the selected location were 8,000
units per year, which location would provide the lowest
total cost

Example: Question 1
Locatio
n

Fixed
Cost Per
Year ($)

Variable
Cost Per
Year ($)

Fixed Cost + Variable Cost = Total

Cost ($)

250,000

11 *
(10,000)

250,000 + 110,000 = 360,000

100,000

30 *
(10,000)

100,000 + 300,000 = 400,000

150,000

20 *
(10,000)

150,000 + 200,000 = 350,000

200,000

35 *
(10,000)

Total Annual Costs

($000s)

800
D 700
600
500
400
300
-A
200
C
- D
100
-

Step 1: Plot only fixed cost on

for =
each
location (at
200,000y-axis
+ 350,000
550,000
Output = 0)
Step 2: For each location plot
total cost across x-axis (at
10,000 units of output)

|
B0

|
2

|
4

|
6

|
8

|
10

|
12

|
14

|
16

|
18

Annual Output in 10,000s

Example: Question 2
Total Annual Costs
($000s)

800
700
600
500
400
300
-A
200
C
- D
100

B Superior
|

B0

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)

|
2

|
4

|
6

C Superior
|
|
|
8
10 12

A Superior
|
|
|
14
16 18

Annual Output in 10,000s

Determine Costs Functions for Locations A, B and

C
Location A: 250,000 + 11 Q
Location B: 100,000 + 30 Q
Location C: 150,000 + 20Q

Example: Question 2
Contd
Determine Costs Functions for Locations A, B and
C
Location A: 250,000 + 11 Q
Location B: 100,000 + 30 Q
Location 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 Q
Q = 11,111 units per year

Cost-Volume-Profit Analysis-Example
Revenu
e

Cost

Total Cost for Alt

A

Total Cost for Alt

B

Fixed Cost for Al

B

Fixed Cost for Al

A

V*

Volume of
Sales

Factor Rating
1. Determine relevant and important factors
2. Assign a weight to each factor with all weights
totalling 1.00
3. Determine common scale for all factors
4. Score each alternative
5. 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: Example

Factors

LOCATION X

LOCATION Y

Weight

Score

Weighted
Factor

Score

Weighted
Factor

Manufacturi
ng Costs

0.5

4.0

3.5

Standard of
Living

0.1

0.7

0.4

Tax
Concessions

0.2

1.0

1.6

Labour
availability

0.2

1.0

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
areequal, the centre of gravity is found by taking
the averages of thexandycoordinates
If the quantities shipped to each location
aredifferent, 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/acc
ounting/accounting-principles-ii/cost
-volume-profit-relationships/cost-vol
ume-profit-analysis
http://
www.wyzant.com/resources/lessons/ac
counting/cost-volume-profit
http://
classes.bus.oregonstate.edu/spri
ng-07/ba422/Management%20Account

Email: bhaktij@gmail.com
Website:
www.headscratchingnotes
.net