location planning and analysis
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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 McDonald’s was first launched in New Delhi - PowerPoint PPT PresentationTRANSCRIPT
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
|16
|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
|8
|10
|12
|14
|16
|18
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
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