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2.2 Location Breakeven Analysis

The document presents a locational-cost-volume analysis problem. It provides the fixed and variable costs for 4 potential plant locations (A, B, C, D). It asks to: 1) Plot the total cost lines for each location on a graph. 2) Identify the output range where each location has the lowest cost. 3) If expected output is 8,000 units, which location has the lowest total cost? The solution plots the total cost lines, showing that location B has the lowest cost up to 5,000 units, C up to 11,111 units, and A above 11,111 units. Therefore, with expected output of 8,000 units, location C has

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1K views3 pages

2.2 Location Breakeven Analysis

The document presents a locational-cost-volume analysis problem. It provides the fixed and variable costs for 4 potential plant locations (A, B, C, D). It asks to: 1) Plot the total cost lines for each location on a graph. 2) Identify the output range where each location has the lowest cost. 3) If expected output is 8,000 units, which location has the lowest total cost? The solution plots the total cost lines, showing that location B has the lowest cost up to 5,000 units, C up to 11,111 units, and A above 11,111 units. Therefore, with expected output of 8,000 units, location C has

Uploaded by

orenchladee
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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Problem 1: Locational-Cost-Volume Analysis

Fixed costs 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
D 200,000 35

a. Plot the total cost lines for these locations on a single graph.
b. Identify the range of output for which each alternative is superior (i.e., has the
lowest cost).
c. If expected output at the selected location is to be 8,000 units per year, which
location would provide the lowest total cost?
Solution 1

a. To plot the total cost lines, select an output that is approximately equal to the
expected output level (e.g., 10,000 units per year). Compute the total cost for each
location at that level:

Location Fixed cost + Variable Cost = Total cost

A $250,000 + $11(10,000) = $360,000


B $100,000 + $30(10,000) = $400,000
C $150,000 + $20(10,000) = $350,000
D $200,000 + $35(10,000) = $550,000

Total Annual Cost ($) vs Annual Output

800000
700000
600000
Annual Output

A
500000
B
400000
C
300000
D
200000
100000
0
B superior C superior A superior
00

00

00

00

0
0

00

00

00

00
20

40

60

80

10

12

14

16

Total Annual Cost ($)


b. The approximate ranges for which the various alternatives will yield the lowest
costs are shown on the graph.

For B and C:

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


Solving the equation, Q = 5,000 units per year.

For C and A:

$150,000 + $20Q = $250,000 + $11Q


Solving the equation, Q = 11,111 units per year.

c. From the graph, the 8,000 units per year at the ranges of location C, that provides
the lowest total cost.

Problem 2: Facilities Planning

The unit price for Turret lathe machine semi-automatic is RM140, 000.00. This machine
can produce 16 components per hour with the labor cost is RM 3.20 per hour. The unit
price for a common lathe machine is RM 50,000. This machine can produce 10
components per hour and the labor cost is RM4.00 per hour. From the data given, by
which number of the components, that purchasing of Turret lathe machine will give more
profit than common lathe machine?

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