Concept explainers
(a)
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)
Explanation of Solution
Given Information:
CP Location Analysis Data | Location 1 | Location 2 | Location 3 | Location 4 | Location 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 Costs | Location 1 | Location 2 | Location 3 | Location 4 | Location 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)
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)
Explanation of Solution
Associated Costs | Location 1 | Location 2 | Location 3 | Location 4 | Location 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:
By solving above equation, we get
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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