Based on Kolesar and Blum (1973). Suppose that a company must service customers lying in an area of A square miles with n warehouses. Kolesar and Blum showed that when the warehouse(s) are located properly, the average distance between a warehouse and a customer is (Ayn)1y2. Assume that it costs the company $90,000 per year to maintain a warehouse and $400,000 to build a warehouse. Also, assume that a $5,000,000 building cost is equivalent to incurring a cost of $500,000 per year indefinitely. The company fills 180,000 orders per year, and the shipping cost per order is $1.25 per mile. If the company serves an area of 120 square miles, how many warehouses should it have?
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
USING EXCEL SOLVER
Based on Kolesar and Blum (1973). Suppose that
a company must service customers lying in an area
of A square miles with n warehouses. Kolesar and
Blum showed that when the warehouse(s) are located
properly,
the average distance between a warehouse
and a customer is (Ayn)1y2. Assume that it costs the
company $90,000 per year to maintain a warehouse
and $400,000 to build a warehouse. Also, assume that
a $5,000,000 building cost is equivalent to incurring a
cost of $500,000 per year indefinitely. The company
fills 180,000 orders per year, and the shipping cost per
order is $1.25 per mile. If the company serves an area
of 120 square miles, how many warehouses should it
have?
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