Locational break - even analysis, Operation Management

Locational Break - even analysis

In comparing several  potential location on  an economic  basis,( i., e, tangible factor)  the only  revenues  and costs  that need  to be considered are the ones  that vary from on e location to another.If revenue per unit is the same regardless of where the goods is produced the total revenues can be eliminated from consideration. An economic comparison of locations can be made by identifying the fixed costs and variable costs plotting the breakeven analysis on graph for each location.

This graphical approach can easily identify the range of annual production volume over which a location is preferable.

The steps involved in this method are:

  1. Determine all relevant costs that vary with each location.
  2. Categorize the costs for each location in to annual fixed costs (FC) and variable costs per unit (VC) and calculate the total cost(TC) for the desired volume of production per annum, for each location.
  3. Plot the total costs associated with each location on a single chart or graph of annual cost versus annual production volume.
  4. Select the location with the lowest total annual cost(TC) at the expected production volume per annum Q

Note : If  revenues vary from  one location  to another then comparison of location should be made on the  basis of profits( i, e, Total revenue  Total cost) at each  location.

Posted Date: 1/11/2013 7:07:16 AM | Location : United States

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