EBK OM
EBK OM
6th Edition
ISBN: 9781305888210
Author: Collier
Publisher: YUZU
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Question
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Chapter 6, Problem 4PA

(a)

Summary Introduction

Interpretation:Best Location needs to be determined using location analysis technique with the help of given data

Concept Introduction: The location analysis method helps in determining the optimal location to run a business efficiently.

(a)

Expert Solution
Check Mark

Explanation of Solution

Given Information:

    CP Location Analysis DataLocation 1Location 2Location 3Location 4Location 5
    Fixed Costs$ 75,000$ 110,000$ 95,000$ 125,000$110,000
    Direct Material Cost/Unit$ 4.14$ 4.65$ 5.05$ 4.50$ 4.50
    Direct Labor Cost /Unit$ 12.45$13.80$ 11.80$ 15.60$ 13.75
    Overhead/unit$ 2.25$ 2.60$ 1.95$ 2.75$ 2.10
    Transportation Cost/Unit$0.5$ 0.65$ 0.30$0.83$0.67

Estimated Annual Production: 30,000 units

The formula for calculating Direct Material cost, Direct Labor cost, Overhead Cost and

Transportation Cost is as follows:

Direct Material Cost = (Direct Material Cost/unit) x Estimated Annual Production

Direct Labor Cost = (Direct Labor Cost/unit) x Estimated Annual Production

Overhead Cost = (Overhead Cost/unit) x Estimated Annual Production

Transportation Cost = (Transportation Cost/unit) x Estimated Annual Production

    Associated CostsLocation 1Location 2Location 3Location 4Location 5
    Fixed Costs$ 75,000$ 110,000$ 95,000$ 125,000$110,000
    Direct Material Cost$ 124,200$ 139,500$ 1,51,500$ 135,000$ 135,000
    Direct Labor Cost$ 373,500$ 414,000$ 354,000$ 468,000$ 412,500
    Overhead$ 67,500$ 78,000$ 58,500$ 82,500$ 63,000
    Transportation Cost$ 15,000$ 19,500$ 9,000$ 24,900$ 20,100
    Total$ 655,200$ 761,000$ 668,000$ 835,400$ 740,600

As per data calculated above, Location 1 provides the least cost.

(b)

Summary Introduction

Interpretation:Best Location needs to be determined using location analysis technique with the help of given data

Concept Introduction: The location analysis method helps in determining the optimal location to run a business efficiently.

(b)

Expert Solution
Check Mark

Explanation of Solution

    Associated CostsLocation 1Location 2Location 3Location 4Location 5
    Fixed Costs$ 75,000$ 110,000$ 95,000$ 125,000$110,000
    Direct Material Cost$ 124,200$ 139,500$ 1,51,500$ 135,000$ 135,000
    Direct Labor Cost$ 373,500$ 414,000$ 354,000$ 468,000$ 412,500
    Overhead$ 67,500$ 78,000$ 58,500$ 82,500$ 63,000
    Transportation Cost$ 15,000$ 19,500$ 9,000$ 24,900$ 20,100
    Total$ 655,200$ 761,000$ 668,000$ 835,400$ 740,600

As per the data calculated above, it can be clearly seen that the order of locations on basis of the lower to higher cost is Location 1 < Location 3 < Location 5 < Location 2 < Location 4.

The total cost associated with Location 2,4 and 5 is considerably high than location 1 and 3.

An appropriate range will be calculated below by comparing the Location 1 and 3.

Let’s assume the demand rate be x.

Total variable cost associated with Location 1 is = $ 19.34

Total Variable cost associated with Location 3 is = $ 19.10

So, the equation to calculate appropriate quantity will be:

  19.34x+ 75000 = 19.1x + 95000

By solving above equation, we get x = 83,333.33

It means that if demand rate is less than 83,333 units, then location 1 will be preferred and otherwise location 3 is chosen if demand exceeds 83,333 units.

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